5 Reasons Roth IRAs Rule

There's more to the traditional-versus-Roth IRA decision than when you pay the taxes. Here are five good reasons to give Roth IRAs another look.

Apr 5, 2014 at 11:00AM

If you've checked out the rules for Individual Retirement Arrangements, or IRAs, you know that traditional IRAs let you take a deduction now for your qualified contributions. You pay the tax when you withdraw your money in retirement.

Roth IRAs, on the other hand, are made with after-tax money. You don't get a tax deduction when you make the contribution. After retirement, however, you can withdraw the money tax free.

That's not the only difference between the two types of retirement plans. Here are five good reasons to contribute to a Roth IRA:

1. You can take your contributions back out of a Roth IRA without penalty
If you're afraid to put money in a traditional plan because you might need it, this is good news. Unlike a traditional IRA that only lets you take penalty-free withdrawals in certain circumstances, Roth IRAs let you withdraw your contributions for any reason. Your reason could be a car repair, an emergency in your extended family, or even a wedding. It's your call.

If you want to take more out of your Roth IRA than your actual contributions, you need to wait until you are at least age 59-1/2 and you have had the account for at least five years. Otherwise, you may have to pay a penalty.

You still don't have to pay a penalty, however, if you withdraw up to $10,000 contributions and earnings for a first-time home purchase. You also qualify for an exception to the penalty if:

  • You spend the money on postsecondary education expenses or back taxes.
  • You are disabled or have medical expenses that exceed 10% of your adjusted gross income.
  • The withdrawals are made when you die.

2. You may be able to contribute to a Roth IRA in some cases when you couldn't contribute to a traditional IRA
The income phase-out ranges for Roth IRAs are considerably higher than those for deductible contributions to traditional IRAs. In addition, with a Roth IRA it doesn't matter whether you or your spouse is covered by an employer retirement plan. The amount you can contribute to a Roth IRA is affected by your modified adjusted gross income as follows:

Filing Status

Modified AGI

Roth IRA Contribution Limit

Married filing jointly or qualifying widow(er)

Less than $178,000

$5,500 ($6,500 if age 50 or older)

More than $178,000 but less than $188,000

A reduced amount

$188,000 or more

$0

Married filing separately (unless you did not live with your spouse at any time during the year)

Less than $10,000

A reduced amount

$10,000 or more

$0

Single, head of household, or married filing separately and did not live with your spouse at any time during the year

Less than $112,000

$5,500 ($6,500 if age 50 or older)

More than $112,000 but less than $127,000

A reduced amount

$127,000 or more

$0

3. You can keep contributing to a Roth IRA so long as you have earnings
That's not a bad idea. Say you're 72 years old and still earning income. You're healthy, and you don't expect to need the money until you're about 82. Consider contributing to a Roth IRA now and taking tax-free withdrawals of both contributions and earnings in 10 years.

4. You can open or add to a Roth IRA by converting a traditional IRA
One way to do this is through an IRA rollover, where you withdraw all or part of the assets in a traditional IRA and reinvest them in a Roth IRA. You'll have to pay tax on the amount of the conversion, so if possible, convert to a Roth IRA during a year when you're in a lower tax bracket. Be sure to reinvest the money within 60 days to avoid a penalty. Another, simpler option is to have the money transferred directly from one trustee to another.

5. You don't have to take money out until you're ready -- if ever
Traditional IRAs were not intended to be used to estate planning. In fact, the planners of IRAs built in certain rules to make sure they were primarily retirement vehicles. After age 70-1/2, you must take minimum required distributions, or MRDs, from a traditional IRA or face stiff penalties. Roth IRAs, on the other hand, have no MRDs. You can leave money in the account as long as you want, which is a great option to have if you'd like to leave your Roth IRA to your heirs or if you simply expect to live a good long time and want your money to last as long as you plan to.

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