Roth vs. Traditional IRA
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Choosing between the Roth IRA and a traditional IRA can be difficult, and its a big decision. Well answer the questions we encounter the most here, but if you would like any additional information, please contact our office.

The Roth IRA is a relatively new retirement vehicle. It was first available for tax years beginning in 1998. Not all taxpayers are allowed to contribute to a Roth IRA, because of rules called "income phaseout limitations." For single taxpayers, the Roth phaseout range is $95,000 - $110,000 and for joint filers it's $150,000 - $160,000.

In other words, if you're single and your adjusted gross income exceeds $110,000, you cannot contribute to a Roth IRA and can only contribute to a traditional IRA. On the other hand, if you're a single filer and your income falls below the $95,000 adjusted gross income limit, you can make the full maximum annual $3,000 (plus an additional $500 if you are over age 50) contribution to a Roth IRA. If your income falls somewhere between this $95,000 - $110,000 range, as a single taxpayer you are eligible to make a partial Roth IRA contribution. The same logic applies to joint filers, subject to the $150,000 - $160,000 phaseout limitations.

Its important to note that contributions to a Roth IRA are never deductible. However, all the money in a Roth IRA account may be withdrawn completely tax free if certain "qualifying distribution" rules are met. By contrast, contributions to a traditional IRA may or may not be deductible and therefore may or may not be withdrawn tax free in accordance with the "qualifying distribution" rules.

Whether or not you can deduct contributions to a traditional IRA depends on your income level. During tax year 2002, single taxpayers who are covered by an employers retirement plan can make deductible IRA contributions subject to an adjusted gross income phaseout range of $34,000 - $44,000. For married taxpayers, an adjusted gross income phaseout range of $54,000 - $64,000 applies if the IRA participant is covered by an employer plan. The phaseout range for an IRA participant who is not covered by a plan but whose spouse is covered is $150,000 - $160,000.

What do these rules mean? If you're single and your adjusted gross income exceeds $42,000, you cannot deduct any portion of your maximum $3,000 ($3,500 if you are over age 50) traditional IRA contribution. You can still contribute the annual maximum to an IRA, but your entire contribution will be nondeductible. The same logic applies to joint filers, subject to the limitations described above.

So, is the Roth better than the traditional IRA? That depends. For taxpayers that are only allowed to make nondeductible IRA contributions, the Roth IRA is clearly preferable. Thats because the contributions to a Roth IRA may be withdrawn tax-free if "qualifying distribution" rules are met. Additionally, qualifying distributions will not be subject the 10% early withdrawal penalty tax.

To satisfy the qualifying distribution rules you must meet a five-year holding period and one of six other requirements:

1) The distribution is made after you reach age 59 .
2) The distribution is paid because of your death or disability.
3) The distribution consists of substantial equal periodic payments.
4) The distribution is used for qualifying medical or health insurance expenses.
5) The distribution is used for higher education expenses.
6) The distribution is used for a first home purchase and is limited to $10,000.

Taxpayers with existing traditional IRA accounts can "roll" or change their traditional IRAs into Roth IRAs. Thats accomplished by paying taxes on the IRA now so you don't have to pay them later. Whether you should do that depends on a lot of factors that will be unique to your own situation. It also requires highly complex "what if" calculations that require a sophisticated computer program and a skilled tax professional. In fact, different computer programs will give you different answers, so you really have to be an expert to do this important analysis correctly!

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