The Facts About Educational And Roth Ira

’s Essay, Research Paper

The Facts About Educational and Roth IRA’s

In 1997 great things came into play for the taxpayers. The Tax Reform Act of 1997, which was inacted by the IRS, allowed single taxpayers and married taxpayers a considerable amount of tax relief for the Educational and Roth IRA’s. Individual Retirement Accounts, also known as IRA’s, are accounts opened in an individual’s name only and provide tax-deferred savings for retirement. The contributions may be fully deductible, partially deductible, or nondeductible.

All IRA’s have the same basic characteristics that enable customers to save money while gaining benefits that may include tax-deferred savings and tax deductions. An IRA is a product in which customers place additional products into, such as CD’s, stocks, bonds and mutual funds. These products are placed into IRA’s to meet customers’ retirement, education, or other future needs. The customers are able to select these products based on their tolerance to risk and their individual investment goals. The IRA will hold these products and provide the potential tax shelter and savings incentives.

In order to explain the great qualities of the Roth IRA and the Educational IRA, you must know just a few things about the Traditional IRA. The Traditional IRA is the original product offered to help individuals set aside funds for retirement. To be eligible to contribute to the Traditional IRA the customer must be 70 1/2 or younger, and have an earned income. With the Traditional IRA any withdrawals are subject to income tax in the year in which they are being withdrawn. In addition there are some penalties which may apply if the individual is under the age of 59 1/2 when the funds are withdrawn. There are only seven ways the customers may withdrawal from their Traditional IRA before age 59 1/2 with out being penalized a 10% premature-distribution penalty. These seven ways would be death, disability, medical expenses over 7.5% of AGI, health insurance premiums for certain unemployed individuals, first time home buyer (up to $10,000), higher education expenses, and substantially equal periodic payments. With the Traditional IRA the maximum contribution allowed is the lesser of earned income or $2,000. This contribution is not tax-deductible (smartmoney, the ira super page, 2000). With a Traditional IRA there are required minimum distributions which must begin in the year that the customer turns 70 1/2. The customer may defer the first year’s distribution until April 1 of the following year after they turn 70 1/2; the IRS penalizes 50% of the distribution amount that should have been withdrawn for the year. Also with the Traditional IRA there are certain taxes which become due after a certain age. After age 59 1/2 income tax is due on earnings and the original contributions are withdrawn tax-free (smartmoney, the ira super page, 2000).

In 1998 an additional way for individuals to save for retirement was introduced to the public as a Roth IRA. These Roth IRA’s are a terrific tax break, especially for individuals previously shut out of the deductible IRA game because their incomes were too high. Here’s why. Unlike traditional IRA’s, Roth contributions are nondeductible. But the earnings build up tax-free (SmartMoney, you wanted to know, 2000). Another great point about the Roth IRA is the fact that any withdrawals are free of federal income tax under certain circumstances. To be free from federal tax the Roth IRA must have been open at least five years and your age must be 59 1/2 or older. To be eligible for a Roth IRA you must have an adjusted gross income (AGI) between $95,000 and $110,000 for single filers and between $150,000 and $160,000 for joint filers. Also with the IRA you are not able to contribute more than $2,000 annually per person. With the Roth IRA there are no taxes due if funds are held in the account for at least five years and you are at least age 59 1/2. Original contributions can be withdrawn tax-free and penalty-free at any time (SmartMoney, the ira super page, 2000). The Roth IRA is designed to provide a tax-advantage for people whose income is too high to deduct a Traditional IRA contribution. Because the Roth IRA requires no lifetime distributions, it allows a larger tax-free benefit to pass directly to the heirs. Unlike the Roth IRA, the Traditional IRA requires minimum distributions at the age of 70 1/2.

There are many other great features of the Roth IRA. One of these is the fact that first-time home purchases are considered tax-free and penalty-free withdrawals from Roth IRAs. Another great aspect of the Roth IRA is that you can still make contributions to the account after you turn 70 1/2 as long as you have a earned income and your AGI is under the eligible amount required. There is only one main factor you must consider when purchasing a Roth IRA at that age, and that is your “health”. This is because you have to wait five years until you can make tax-free withdrawals. And to add on to that, your beneficiaries are not taxed on the assets from your Roth IRA. There are two main types of Roth IRA’s that are offered for individuals. They are the Contributory Roth IRA, and the Conversion Roth IRA. The Contributory Roth IRA is for an individual who opens a new Roth IRA. The Contributory Roth IRA is available to Traditional IRA owners with an income of $100,000 or less whether they are filing with single