|
To Roth or not to Roth?
|
 |
April 4, 2000: 10:06 a.m. ET
Just two years old, the new IRA is an investment option, but very confusing
By Staff Writer Jennifer Karchmer
|
NEW YORK (CNNfn) - John Sofokles, 30, could barely keep his eyelids open when he researched whether to open a Roth IRA or a traditional IRA. There were so many long-winded pamphlets and Web sites with information his eyes would glaze over.
It wasn't until his financial adviser explained the details that he decided he was better off with the Roth's tax-free withdrawals in his golden years rather than tax-free contributions under the traditional plan.
"Everybody talks about it, that it's such a good thing," said Sofokles, a computer network engineer for the U.S. Treasury in Washington.
But deciding on whether the Roth IRA or the traditional plan is right for you isn't easy.
Roth regimen
"Younger people especially, I urge them to open a Roth," said Bob FitzSimmons, a certified financial planner in Lincoln, Neb. "I open them up regularly."
Unlike the traditional IRA, contributions to the Roth IRA are not tax deductible, but the withdrawals are tax-free when it's time to retire.
But this relatively new retirement plan isn't designed only for younger people who are either just starting their first job or having their first baby.
An incentive to save
The Roth IRA, introduced by Sen. William V. Roth, Jr., R-Del., as part of the Taxpayer Relief Act of 1997, was designed to encourage Americans to save for their golden years.
And plenty of Americans are jumping on the Roth bandwagon. According to the mutual fund group Investment Company Institute, 7.1 million households opened a Roth account in the first 18 months it was introduced.
Industry insiders say that's pretty remarkable compared to the 25.5 million households that hold traditional IRAs, which were introduced in 1982.
A taxing proposal?
"Being able to get tax-free withdrawals is very powerful, so the general notion is you should look to the Roth IRA right away," said FitzSimmons. While it is tempting to take the tax deduction under the traditional IRA, you do pay more in the long run, he added.
Chris Mossing, a 44-year-old software salesman in San Jose, Calif., is considering a Roth IRA because he can't deduct his contributions to a traditional IRA.
In Mossing's case, because his salary exceeds the required limit and he contributes to a 401(k) plan at work, he is not eligible to make deductible contributions to a traditional IRA, so some financial pros advise him to open a Roth instead.
"This is my second year talking to my tax guy," Mossing said. "He's a registered tax preparer and even he's confused."
With a wife and two small children, Mossing's got college education and maybe even a new home on his mind, so the Roth IRA may afford him greater flexibility down the road if he wants to take an early distribution, planners say.
If you choose a Roth IRA:
- You are still allowed to contribute even if you have an employer sponsored plan such as a 401(k).
- Distributions of earnings and principal are tax-free if you're at least 59 1/2 and the account is at least five years old.
- Early withdrawals can be made penalty free for a first-time home purchase and college education.
- You're not required to begin distributions at age 70 1/2.
If you choose a traditional IRA:
- Earnings are tax deferred.
- Distributions are taxed as ordinary income.
- Withdrawals before 59 1/2 are subject to a 10 percent penalty, except for death, disability, college education or first-time home purchase.
- Distributions must begin after age 70 1/2.
Wading through the rules
You can open a Roth IRA whether you're hitched or still living the single life. The main factor is your adjusted gross income, which is your annual salary plus any taxable income such as investment dividends, capital gains, or self-employment income.
If you're single, you can open a Roth IRA if your adjusted gross income is less than $95,000. If you earn between $95,000 and $110,000, the maximum amount you can contribute each year is reduced proportionately. For example, a taxpayer with adjusted gross income of $102,500 can contribute only $1,000 to a Roth IRA, according to the IRS.
If you're single with an adjusted gross income of more than $110,000, you can't open a Roth IRA.
If you're married, you can open a Roth IRA if you file jointly with adjusted gross income of less than $150,000. But if your combined adjusted gross income is between $150,000 and $160,000, you are limited in your contributions.
If you're married and the combined adjusted gross income is greater than $160,000, then neither spouse can open a Roth IRA.
Putting away only $2,000 a year may seem like a drop in the bucket for some but under the law, that's the maximum contribution you can make for both types of IRAs.
Rep. Dennis Moore, D-Kan., and Rep. Elton Gallegly, R-Calif., have both proposed bills to increase the contribution limits to $5,000 from $2,000, the level established in 1981. And financial advisers say it's about time.
But it's still uncertain when the proposed limits will come up for a vote, especially during this election year.
It's never too early
Even teenagers have retirement on their minds.
Eddie Brownstein, 16, a high school junior near Dallas, is considering opening a Roth IRA to invest some of the money he earns as a part-time Internet tech supporter.
"It sounds like a pretty good deal," said Brownstein of the Roth, which he discusses with his friends at lunchtime.
FitzSimmons says teens can open a Roth if they have earned income and a parent or guardian acts as a custodian to authorize transactions. Once the youngster turns 18, he owns the account and can authorize his own transactions. 
|
|
|
|
|
 |
|
