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O'Connor: Is a Roth IRA right for your investments?

Published: Saturday, Nov. 23, 2013 5:30 a.m. CDT

(Continued from Page 1)

The Roth IRA can be an exciting way to save for your future retirement needs.

If you earn income (or are married to someone who does and file jointly), you might be able to contribute to a Roth IRA – even if you participate in a qualified employer sponsored retirement plan where you work or are over age 70½.

A Roth IRA is a flexible way to potentially build substantial retirement balances, to provide future tax-free income, or to help accumulate possible significant assets, free from income taxes, for your heirs. Because it also offers a broad range of investments, there might never have been a more attractive way to potentially accumulate assets.

Roth IRAs can be a viable alternative if you have been making nondeductible traditional IRA contributions. If you are within or under the modified-adjusted-gross-income limits, you can contribute to a Roth IRA instead. A Roth IRA allows you to make nondeductible annual contributions. All potential earnings growth in these accounts may be distributed from the Roth IRA federal income tax free and penalty free if you have had the account for more than five tax years and are at least age 59½, or as a result of death, disability or being a qualified first-time homebuyer.

Your financial adviser and your tax adviser can help you determine whether a Roth IRA offers you advantages over a traditional IRA.

Rules for contributions

Unlike traditional IRA contributions, which may be deductible, Roth IRA contributions are made on an after-tax basis. You can receive federal tax-free distributions if you have had the account for more than five tax years and are at least age 59½, or as a result of death, disability or being a qualified first-time homebuyer in exchange for the up-front taxation.

You can contribute to a Roth IRA after 70½ years old, as there are no age restrictions on making a contribution.

You are eligible to contribute to a Roth IRA as long as you, or your working spouse, continue to have earned income and are within or under the modified-adjusted-gross-income limits, provided your total IRA contributions do not exceed earned income. The annual Roth contribution is aggregated with any traditional IRA contribution you may make. 

The annual contribution for 2013 is $5,500, with a catch-up contribution of $1,000 if you are 50 or older.  

The modified-adjusted-gross-income eligibility limits for 2013 are as follows:

• Full contribution if your modified-adjusted-gross-income is less than $112,000 for single or head of household filers or $178,000 for joint filers.

• Partial contribution if your modified-adjusted-gross-income is $112,000-$127,000 for single or head of household filers, $178,000-$188,000 if married and filing jointly, or $0- $10,000 for those married and filing separately (if you did not live with your spouse at any time during the year, your filing status is considered as single for this purpose).

• No contributions if your modified-adjusted-gross-income is greater than $127,000 for single or head of household filers, $188,000 for those married filing jointly, or $10,000 for those married and filing separately (if you did not live with your spouse at any time during the year, your filing status is considered as single for this purpose).

The Roth IRA imposes no requirements for distributions because of age.      

Additionally, remember that unlike the traditional IRA, taking required minimum distributions is not necessary during your lifetime with a Roth IRA. This optimizes your opportunity to build tax-free wealth. Your spouse beneficiary has the right to rollover your Roth IRA and to treat it as their own, meaning they are not subject to required minimum distributions either.

This may allow for an additional period of tax-free compounding of potential earnings that can help a family grow wealth.

If distributions are taken, the rules discussed above will apply. However, if the surviving spouse has other Roth IRAs that pre-date this rollover, their previous Roth IRA five-year rule will apply to all Roth IRAs now owned by the survivor. Your non-spouse beneficiary should start required minimum distributions the year after the year of your death if they want to take advantage of the stretch IRA strategy. This may make the Roth IRA a valuable tool for estate planning.

Qualified Roth IRA distributions are not subject to state and local taxation in most states and also are federally tax-free provided a Roth IRA has been open for at least five years and the owner has reached age 59½ or meets other requirements. Nonqualified distributions may be subject to income tax and an additional 10 percent early-distributions penalty.

Wide range of choices

We urge our clients to be prudent in their retirement planning decisions. However, that doesn’t mean you’re locked into a narrow range of choices. Your Roth IRA might include a myriad of investment choices, such as mutual funds, stocks, bonds, certificates of deposit and annuities.

Talk with your financial adviser

The way you invest for your retirement is a very important financial decision. For help in determining whether a Roth IRA should be part of your investment strategy, talk with your financial adviser today.

• Patrick S. O’Connor is the managing principal, senior financial adviser, PIM portfolio manager and a chartered retirement planning counselor at Wells Fargo Advisors Financial Network in Algonquin. He can be reached at 847-458-0142, p.oconnor@wfafinet.com or www.algonquin.wfadv.com.

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