ROTH IRA
A Roth IRA is a unique retirement savings vehicle that has multiple uses. For individuals who qualify for a ROTH IRA, the account funds can be used to help pay for education expenses or a first time home purchase tax free. In addition, the amount that you contribute (the principal) can always be withdrawn tax and penalty free!
Qualifying for a ROTH IRA
In 2012, if you earn less than $173,000, you can contribute up to $5,000 per year for both you and your spouse ($10,000 total). If you are over 50, you can contribute $6,000. If you earn more than $183,000, you are not able to contribute to a ROTH IRA.
Unlike a traditional IRA that is often tax deductible, the ROTH IRA has no up front tax benefit. The benefit comes when you withdraw qualified funds which do not incur any income taxes on the earnings.
The earnings, however, can’t be withdrawn without incurring a penalty until you are age 59.5 and have had the ROTH for five years.
Converting to a ROTH IRA
If you have a traditional IRA, you can convert it to a ROTH IRA regardless of your income. If you decide to convert to a ROTH IRA, you will have to pay taxes on the amount that you convert in the year that you convert.
Please remember that even though there is no up front tax deduction, you must report any ROTH IRA contributions on form 8606 of your tax return. Failure to file form 8606 may result in having to pay tax and a penalty on your contributions!
Stuart Steinberg, CPA, MBA has owned a strategic tax planning practice on the North Shore for 23 years. Please feel free to contact him anytime and let Erock Tax take care of you!