Tax “Roth IRA” Helps Retirees
Many retirees believe the myth that taxes decline in retirement. The truth is without some planning taxes will stay the same or even increase during retirement. Tax breaks specifically for seniors are rare these days. Tax traps and a retirement tax ambush are more likely. You need to continue tax planning through retirement to ensure your retirement fund lasts a lifetime.
Unknown too many pre-retirees, taxes are likely to be your largest expense in retirement. While most people worry about medical expenses and long-term care, the biggest drain of your retirement income will be taxes. Income taxes are likely to take the largest share. There also will be sales taxes, real estate taxes, personal property taxes, and taxes on capital gains.
The recent survey of retirees between ages 70½ and 75 with a net worth of at least $1 million, by Securian Financial Group, found taxes were the largest expense by a wide margin. Taxes, in fact, took about 4% of net worth every year. That is 4% of net worth, not of income. The percentage of income taken by taxes is much higher. It is tough to have net worth increase or remain stable when one expense is taking such a large portion.
Tax Advantages of Roth IRA
The Roth IRA offers a tax advantage of a different type. Your contributions give you no current break on your income tax like the traditional IRA.
However, when you start taking money out of a Roth IRA it is tax-free. Your contributions have already been taxed, since you fund the Roth with after-tax dollars. Your earnings in the Roth IRA grow tax-free, which is different from the traditional IRA.
If you anticipate that you will be in a high income tax bracket after you retire, the Roth IRA may be one way to provide some tax-free income.
The contribution limits for the Roth are the same as for the Traditional IRA.
You can contribute to a Roth IRA if your modified adjusted gross income is below $110,000 for people who file as singles. If you file jointly, the income level is $160,000.
A Roth IRA (individual retirement account) is one of the most exciting retirement planning opportunities currently available. Tax-free growth is a Roth IRA’s most important benefit. Roth IRA considerations include:
Who Should Open a Roth IRA
A Roth IRA is particularly attractive to
- those not eligible to receive a 401(k) employer matching contribution
- those able to save more for retirement than the amount that their employer matches
With opportunities for tax-advantaged growth limited, a Roth IRA is a great way to become financially independent by retirement.
How and Where to Open a Roth IRA
You can open a Roth IRA at nearly any annuity broker, bank or brokerage house, either in-person or online. Opening a Roth IRA is a very simple process, typically with help readily available. Often, there are just a few forms for you to complete. Bring your Social Security number with you as well as the Social Security numbers and addresses of any potential beneficiaries of your account.
Earned Income
The amount you are permitted to contribute to a Roth IRA is limited to your earned income. Earned income includes wages and self-employment earnings, but does not include interest or dividends. If you are married, your combined contribution limit is restricted to the total of your combined earned income.
Contribution Limits
As of 2008, contribution limits are indexed to inflation and will increase in $500 increments (as necessary). Unfortunately, there’s not much to report here, as the limits are staying the same in 2009 as they were in 2008. What follows is a table of contributions limits starting back in 2002, and running through next year.
| Year | Under Age 50 | Age 50+ |
| 2002-2004 | $3,000/year | $3,500/year |
| 2005 | $4,000/year | $4,500/year |
| 2006-2007 | $4,000/year | $5,000/year |
| 2008 | $5,000/year | $6,000/year |
| 2009 | $5,000/year | $6,000/year |
The silver lining here is that the cutoffs for making Roth IRA contributions and for deducting Traditional IRA contributions have increased 2009.
Roth IRA Contribution Thresholds
If you’re married and filing jointly, you can make your full Roth IRA contribution as long as your modified adjusted gross income (MAGI) is below $159k, and your ability to contribute phases out entirely at $169k. For single filers, the thresholds are $101k and $116k.
Traditional IRA Deduction Thresholds
If you’re married and filing jointly, you can make deduct your full Traditional IRA contributions as long as your MAGI is below $85k, and your ability to deduct contributions phases out entirely at $105k. For single filers, the thresholds are $53k and $63k.
Deadlines for Contributing
Remember, you can make 2008 contributions all the way up to April 15, 2009. As for 2009 contributions, you can start as early as January 2nd, 2009 with a deadline on the back end of April 15, 2010.
Source: IRS.gov*
*As of this writing, the IRS has not released Publication 590 for 2008. However, this information (for 2008) can be found in the 2007 version of Publication 590, as well as from multiple other reputable sources.
No Tax Deduction
No tax deduction is available for a Roth IRA contribution. (Many individuals receive a tax deduction for their traditional IRA contributions, however.)
Tax-Free Growth
The money you contribute to your Roth IRA grows tax-free. You do not have to pay any taxes on the earnings in the account. In fact, you do not even report the income to the IRS. Even in retirement, when you ideally first access your Roth IRA money, you do not owe taxes on the distribution. If you take your Roth IRA money prior to retirement, however, taxes may be due.
Income Limitations
Eligibility to contribute to a Roth IRA is restricted by your filing status and modified adjusted gross income. The Roth IRA income limitations change each year.
No Required Distributions
Unlike 401(k) plans and traditional IRAs, there is no age at which you must begin to distribute money from your Roth IRA. As a result, Roth IRAs are an excellent tool to pass along wealth to your children or grandchildren.
