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A Roth IRA is a retirement account that was set up by the U.S Government in 1997 to help Americans set aside money to be potentially tax-free in retirement. The Roth offered a substantial change to “Traditional” IRAs which have been available to the public since the early 1970’s.

Traditional IRAs, offers a potential tax deduction as an incentive to save, the Roth IRA does not. Instead, current year contributions are made after-tax; those contributions grow tax-deferred until you withdraw the money. This allows people who believe their income, or tax rates, will be higher in the future the opportunity to pay the taxes on contributions today and have the potential to not pay taxes in the future when money is withdrawn.

To qualify for income tax-free distributions from a Roth IRA you must have the account open for five (5) years and be over the age 59 1/2 at the time of distribution. Early distribution would be taxable in the year they were made and would be subject to a premature distribution penalty, like other retirement plans. You can also have early access to the gains in the account penalty-free for a few reasons: you can take up to $10,000 of earnings towards buying a first home for yourself and certain family members or if you become disabled. Contributions made to a Roth IRA can be withdrawn at any time without penalty.

Eligibility for a Roth IRA is based on the income of you and your spouse and is based on a scale. Below is the Roth IRA threshold – which changes regularly. As your income increases and you reach the threshold, the Government reduces the amount you can place into a Roth IRA. Above the threshold, you cannot save into a Roth IRA, but you may still qualify for other types of plans. Distributions from Roth IRAs are not mandatory and can be delayed beyond the Required Minimum Distribution (RMD) age 70 1/2 standard to most qualified retirement plans.Also, any savings can go into a ROTH IRA.  As a result, they offer some unique estate planning opportunities.

Roth IRA contribution limits

Roth IRA contribution limits

To be eligible to make a contribution to a Roth IRA, an individual’s modified adjusted gross income (MAGI) must be less than a stated amount, depending on tax-filing status.

Income Limits for Roth IRA MAGI 

Income Limits for Roth IRA MAGI

Roth Conversions

You can also convert other retirement plan money into a Roth IRA. This can be extremely beneficial for people who cannot qualify to make contributions to a Roth IRA directly. When you convert from a pre-tax plan to a Roth, you will have to pay taxes on the conversion. The amount of money converted into a Roth IRA would be included on your current year’s income and is therefore taxable. It is important to take the amount of those taxes and how you are going to pay them into consideration before starting the process.

For more information about how Roth IRAs can play a role in your planning, contact a Trilogy advisor.

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