Jill on Money: Why you should consider a Roth IRA
Sunday, March 19, 2017
By Jill Schlesinger
Tribune Content Agency
The Roth IRA turns 20 years old this year. The retirement vehicle was part of the Tax Relief Act of 1997, and it was seen as such a boon to savers that many believed that it would not survive. Two decades later, it is alive and well. As many Americans consider funding retirement plans this tax season, it's a good opportunity to review the Roth. 
  A Roth IRA is an individual retirement plan that allows participants to save for the future. Unlike other plans such as a traditional IRA or an employee-sponsored 401(k), contributions to a Roth IRA are not tax-deductible. They are made with after-tax dollars, but the money in the account grows tax-free. When you take a qualified distribution from your Roth IRA, you do not have to pay taxes on the money. 
  Not everyone can contribute to a Roth IRA; there are income limits. For 2016 tax filing season, you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income (AGI) is less than:
  -$194,000 for married filing jointly or qualifying widow/widower (contribution reductions start at $184,000);
  -$132,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year (contribution reductions start at $117,000); 
  -$10,000 for married filing separately and you lived with your spouse at any time during the year.
  As with a traditional IRA, you can put $5,500 into a Roth every year. If you are over age 50, you can add an extra $1,000, for a total of $6,500.
  As with a traditional IRA, you can start penalty-free distributions at age 59 1/2. If you want access to your funds earlier than that, Roth IRA withdrawal and penalty rules vary depending on your age. Generally speaking, because you have contributed an after-tax dollar into the account, you can withdraw contributions at any time tax- and penalty-free. To do so, you will need to keep spotless accounting records on your annual contribution amounts.
  Five years must have elapsed since the tax year of your first Roth contribution before you can access the earnings (as opposed to the contributions, as discussed above) in the account without taxation. This rule applies to all owners, regardless of age. Presuming you reach the five-year hurdle, you can access funds after 59 1/2, but there are a number of exceptions that may allow you to access your Roth before age 59 1/2. For example, you can use Roth funds for a first-time home purchase (up to a $10,000 lifetime maximum), to cover qualified education expenses and to pay for unreimbursed medical expenses or health insurance if you're unemployed or if you become totally disabled. Check the IRS rules for a rundown of qualified distributions and exceptions.
  Unlike with a traditional IRA, you need not take a required minimum distribution (RMD) from a Roth IRA. You never have to withdraw money if you choose not to do so. However, upon the death of a Roth IRA owner, the beneficiaries must take RMDs, although the distributions remain tax-free.
  The advantages of a Roth IRA are simple: If you are in a low tax bracket, the Roth allows you to pay taxes at your current rate, and when you take your distributions, you avoid paying taxes at your future (hopefully) higher rate. The Roth is also great for those who want to enjoy tax benefits during their lives and then be able to pass on funds that have already been taxed to their heirs.
Jill Schlesinger, CFP, is a senior business analyst for CBS News and the Senior CFP Board Ambassador for the Certified Financial Planner Board of Standards, Inc. Contact her at askjill@JillonMoney.com.
This was printed in the March 19, 2017 - April 1, 2017 edition.

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