What’s new about the Roth IRA

If your income is below $110,000 (
single) or $160,000 (married
and filing jointly), you can contribute $2,000 a year to
a Roth IRA — and this contribution is permitted even if you
participate in other pension or profit-sharing plans.
The Roth IRA, introduced in 1998, offers the benefit of taxfree
withdrawals (if you are 591⁄2 and the account has been
held at least five years). If you choose a Roth IRA, your
$2,000 contribution comes out of income you’ve already paid
taxes on (that is, earnings). That’s very different from the traditional
IRA, in which your contribution may come from
pretax earnings.

Like a traditional IRA, the funds contributed to a Roth IRA
accumulate tax-free. The big difference is that if you are 591⁄2
and have held the Roth IRA for five years, you never pay tax
on the money you withdraw. That means that the earnings
on the $2,000 you contribute annually are tax-free.
If your income is more than $
110,000 and you’re single, or
if you’re married and you and your spouse have a combined
income of over $160,000, you’re not eligible for a Roth IRA.

Another advantage of the withdrawal requirements of a Roth
IRA is that you’re not required to take your money out of a
Roth IRA when you reach 701⁄2 as you are with traditional
IRAs. In fact, you can leave the money and all the earnings
to your heirs, if you want to. This allowance enables you to
control the timing and the pace of your withdrawals from
the account, potentially allowing the funds to stay there,
growing tax-free, for more years.
Investors can contribute to both a
traditional IRA and a
Roth
IRA; however, the total contribution to the two accounts can’t
exceed the $2,000 annual limit. Many financial advisors say
that if you are young and in a low tax bracket, you should
probably open a Roth IRA and fund it with the full $2,000
every year. For most people, it’s not worth debating over the
two because only those who have relatively low incomes or
no other active retirement plans can take advantage of the
deductibility of the traditional IRA.