Roth IRA and Tax

Roth IRA is the version of non tax deductible IRA. When you contribute the money towards the Roth IRA you don't get the tax deduction then, but after a five year holding period you can withdraw it tax free upon reaching age 59½, or in case of disability, death or first-time home purchase. This is a major tax savings tool and used widely. You also have the choice of making non tax deductible annual contributions of up to $4,000 to a Roth IRA. You can then continue to make non tax deductible contributions to a Roth IRA after age 70½ and there are no minimum distribution requirements. The Roth IRA phases out for singles with Modified Adjusted Gross Income of between $95,000 and $110,000 and couples with Modified Adjusted Gross Income of between $150,000 and $160,000. Roth IRAs could make contributions to some employer plans less attractive because amounts contributed to and earned in employer plans are only tax deferred but the amounts in the Roth IRA are tax free.

There are several options to consider when you deposit in a Roth IRA. Be prepared to pay income tax when you convert regular IRA into Roth IRA, but lawmakers waived the usual 10 percent penalty tax for early withdrawals from an IRA. A separate Modified Adjusted Gross Income limit of $100,000 applies to people who roll over their regular IRA to the Roth IRA. Distributions from a Roth IRA are qualified and thus tax free if is made after the five year holding period if the person is 59½ or older, is disabled.