Roth IRA good for knowlegable investors
The Roth IRA is the best deal for investors since the age of the Robber Barons, when you didn’t have to pay income taxes.
The facts are very straightforward. This has opened the biggest marketing bonanza for the banks and brokerage houses that will want to sell you this new program and convert your “traditional” or old IRAs to the new Roth IRA. It also leaves open the chance for abuse on investors who don’t do their homework. Read on for the details of how to utilize this new opportunity and how not to be taken advantage of.
The new Roth IRA is part of the Taxpayer Relief Act of 1997 that has made some of the most sweeping changes to the way that we will be able to save for our retirement. The Roth doesn’t have the penalty structure of the traditional IRA and is very flexible if you should need your contribution back for any reason. It is the opposite of a traditional IRA. With the old IRA, you get a tax deduction when you put money in, and pay income tax on what you take out. With a Roth IRA, there’s no deduction at the beginning, but withdrawals are tax free.
If you put $2,000 into a Roth IRA each year for the next 10 years and earn 10 percent a year, it would grow to $35,062. How about a married couple putting away $4,000 a year for the next 15 years and it grows 10 percent a year. You would have $139,799. And you can take your earnings out tax free if you follow a few simple rules, or until Congress changes the law.
Now the tricky part of the new Roth IRA. You can convert your traditional IRA to the new Roth IRA, but you need to apply some common sense if you should convert.
Jerry Klosterboer, a Certified Financial Planner with First Allied Securities in Zephyr Cove, Nev., says, “Converting your IRA to a Roth IRA could be of great benefit. After paying the tax over the next four years, all future earnings are tax-free, not tax-deferred. With the long-term earnings growth being the largest portion of any IRA, this is a tax windfall.”
If you convert your traditional IRA to a new Roth, you will have to pay taxes on the sale of your old IRA; however, if done this year, you can spread your tax payments over four years. The 10 percent normally taxed for early distribution before age 59-1/2 is waived.
You cannot convert your old IRA if married and filing separately or if your income is more than $100,000. The proceeds from the conversion does not count toward your income. “Deciding to convert to a Roth IRA depends on your own, unique situation. Check with your tax advisor to see if converting makes sense for you,” says Karsen Garret, a South Lake Tahoe CPA.
Experts recommend that you consider what the extra tax will do to your present tax situation and to pay the taxes on converting out of nonIRA funds, so the IRA continues to grow and gains the advantage of being tax free when you take your funds out.
Important news on conversion: Keep a Roth conversion separate from a new Roth, because of taxation. You cannot take the funds out of the conversion before four years or there is a 20 percent penalty.
Don’t believe the ads and commercials from the financial institutions that “every one” of their brokers is knowledgeable on Roth IRA conversions. The rules on this new retirement plan are currently still under change in Congress, so make sure you get professional advice.
Do you have to pay more commissions when you convert? After contacting several of the large discount brokerage houses and mutual funds, no commissions on funds or stocks are being charged for this transfer.
“The Roth IRA conversions are simply a paper transfer and we don’t feel that charging the client a commission is necessary,” said Tracey Gordon, vice president with Charles Schwab and Co.
Other features of the Roth are for first-time home buyers. You have IRS penalty-free access to your earnings for the first-time purchase of a home, up to $10,000. Also, you can use your earnings tax free for educational purposes to send children to college.
Other tax-free and penalty-free withdrawals are if you are 59-1/2 years old, in the case of death or disability.
Well, it does sound too good to be true. You can let your money grow tax free and take it out tax free. Have access for college for the children, for a first-time home purchase, if you get disabled, or if you just want your original contribution back. It looks like a winner. But remember one thing, the one piece of information that is not in any of the literature being sent out on the Roth IRA is that Congress can change the tax laws again in the future. Keep that in the back of your mind, but don’t let that stop you from investing in this new advantages program for all of us.
The basic rules of the Roth IRA:
— Contributions are not tax deductible.
— Are you eligible? If you’re a single taxpayer with annual income of up to $95,000 or if you’re married and file jointly with an annual income of no more than $150,000, you can contribute yearly up to $2,000 for a single taxpayer and $4,000 for a married couple.
— Age – you can start a Roth IRA even if you’re over 70-1/2 and there is no mandatory age to withdraw funds and yes, you can leave your Roth IRA for the next generation.
— Distributions: You can withdraw your original investment from your Roth IRA at any time, but cannot put it back if you wait longer than 60 days. Anything that you have earned beyond your original contribution needs to be left in the account for five years or until 59-1/2. If taken out prior, you pay taxes and a 10 percent penalty.
Jeff Seidel is the president of Seidel Securities & Insurance Agency, South Lake Tahoe. Reprints of his articles are available by sending a self-addressed stamped envelope to: Jeff Seidel c/o Tahoe Daily Tribune; 3079 Harrison Ave.; South Lake Tahoe, Calif. 96150.
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