Don't Overlook Roth IRA
By Philip J. Beavers, CFP,
WEAC's Member Benefits Specialist
October 1998
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Perhaps the most significant IRA change in 1998 was the addition of the
Roth IRA, named after Senator William Roth of Delaware, the Finance Committee
Chair.
Roth IRAs lack the pre-tax deposit advantage of a regular IRA (up-front
tax deduction). However, they offer an opportunity for tax-free income
upon withdrawal and are not subject to minimum required distribution rules
upon reaching age 70½. The money will grow tax-free and can be withdrawn
tax-free after age 59½, providing the account is at least five years
old.
Non-taxable, qualified distributions from a Roth IRA are distributions
made at least five years after the first taxable year in which the individual
made a contribution to the Roth IRA if they are made:
- After the individual reaches age 59½
- After death
- Due to disability, or
- For qualified, first-time home purchase.
Individuals with an adjusted gross income up to $95,000 and married couples
with an AGI up to $150,000 can make a full contribution to a Roth IRA
($2,000 for individuals and $4,000 for married couples). A partial contribution
can be made by individuals with an AGI of $95,000 to $110, 000 and by
married couples with an AGI of $150,000 to $160,000.
Contributing money to a Roth IRA will not affect the maximum annual contribution
which a person can make to a tax-sheltered annuity.
Contributions to a Roth IRA rather than a TSA may be more advantageous
for some WEAC members. Members in a low tax bracket now who expect to
be in a higher tax bracket when they start withdrawals might be better
off using the Roth IRA. Members who will have a full Wisconsin Retirement
System benefit and who have a large TSA account balance may also find
the Roth appealing. Members who expect to be in a lower tax bracket when
they will be making withdrawals may do better with a TSA. I would encourage
most members to use both a Roth IRA and a TSA.
The law allows taxpayers with an AGI of less than $100,000 to convert
existing regular IRAs into Roth IRAs. Income taxes must be paid on the
conversion. The $100,000 AGI limitation is computed without including
the income that results from the conversion. If the conversion is done
in 1998, taxpayers can spread the tax payments over four years, or the
taxpayer can elect to recognize all of the income in 1998. Conversions
to Roth IRAs in 1999 and subsequent years are taxable in the year of the
conversion.
Generally, the longer a person has until projected withdrawals, the more
financial sense it makes to convert to a Roth IRA. Calculations take into
consideration the return on investment, the length of deferral, and the
marginal tax bracket when one makes withdrawals from a regular IRA. Therefore,
members who will stay in the same tax bracket and do not anticipate taking
monies from their Roth IRA for at least 12 to 15 years could benefit by
converting from a regular IRA.
Some members might consider converting regular IRAs to Roth IRAs for
estate planning. Keep in mind you do not want to take the tax payments
on the conversion out of your IRA monies. You need sufficient other monies
to pay the tax.
Principal features of a Roth IRA include:
- No tax deduction is allowed for contributions.
- Income accumulation is tax free.
- Qualified distributions are not subject to federal income taxes.
- No distribution is required when the individual reaches age 70½.
- Distributions are only required upon death.
- Rollovers are permitted from one Roth IRA to another Roth IRA.
Posted October 2, 1998