Retirement Plan - Roth IRAs

You contribute to Roth IRAs using after-tax dollars but when you withdraw the funds in retirement, you will not owe income tax on the withdrawals.

With a Roth IRA, you use after-tax dollars to make your contribution, but when you withdraw the funds in retirement, you will not owe income tax on the withdrawals. You must have earned income to contribute to a Roth, and you can continue to contribute past age 70 1/2. But as with all the IRAs, you are limited to a $2,000 annual contribution.

There are some rules you must live with. Withdrawals form the account will be free of income taxes if the owner has held the Roth IRA for at least five years and has attained the age or 59 1/2. Other withdrawals allowed after the five-year holding period would be for a disability or a first-time home buyer distribution.

The minimum distribution rules do not apply to the Roth IRA, and funds can stay in the account past the owner reaching age 70 1/2. The value of Roth will continue to grow tax free for your heirs if you choose not to withdraw the funds. Your heirs can choose to stretch the withdrawals of the inherited Roth IRA over their life. If you estate is very large, the Roth IRA proceeds may be subject to estate taxes.

As with all good things, there are limitations, Contributions are phased out for single taxpayers if your adjusted gross income (AGI) is between $95,000 and $110,000 and for married couples filing jointly with an AGI between $150,000, and $160,000.

Roth IRAs are good choices for saving for retirement. The younger you are, the sweeter the deal, and you can convert a regular IRA to a Roth IRA. The proceeds of your IRA will be taxable into the year you make the conversion, but here will not be a 10 percent penalty due if you are under age 59 1/2. If your AGI is over $100,000, whether you are single or married, you cannot convert your IRAs.

A conversion works best if you do not need to take money out of the IRA to pay the taxes that will be due. You want to be able to leave the IRA intact. You can choose the convert only part of your IRA. This feature will allow you to convert only the amount you can afford to pay taxes on.

Look at what an annual $2,000 contribution to an IRA can do over time assuming a 10 percent return on your money. To achieve a 10 percent return over a long period or time, your assets will need to be primarily invested in stocks. Now, think about this for a moment. What if all the money in your IRA was in a Roth IRA and there would be no income taxes due? Pretty nice, huh?