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The IRA and the Roth
IRA are excellent individual retirement savings programs. There is
no dollar limit on the amount that can be transferred from an IRA to a Roth IRA.
There are several unique attractions about the Roth IRA that the
traditional IRA or other retirement programs do not provide. The
most important is that you can withdraw your money at retirement
tax-free. That is not the case for your 401(k) retirement savings,
your TSP, your social security payments or your employer-sponsored
pension plan. |
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| Features of
the Traditional IRA vs the Roth IRA |
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Traditional IRA |
Roth IRA |
| Maximum yearly contribution (2004) |
$3,000 ($3,500 if age 50 or older) |
$3,000 ($3,500 if age 50 or older) |
| Rollover/Conversion |
Funds may be rolled over from other qualified retirement
plans to an IRA |
Funds
from 401(k) and other qualified plans can not be rolled
over to a Roth IRA. They must first be transferred to an
IRA before converting to a Roth IRA. |
| Tax-deductible contributions |
Yes. Fully deductible if neither you nor a spouse is
covered by a retirement plan. Otherwise, your deduction
depends on your income and filing status. |
No. Contributions to a Roth IRA are never tax
deductible. Only those below a certain income limit are
allowed to contribute. |
| Age restriction on contributions |
Yes. You cannot make contributions beginning with the
year you reach age 70½. |
No |
| Tax-deferred growth |
Yes |
Yes |
| Required minimum distributions during lifetime |
Yes. Distributions must begin by April 1 following the
year you reach age 70½. |
No. Distributions are not required during your lifetime. |
| Federal income tax on distributions |
Yes, to the extent that a distribution represents
deductible contributions and investment earnings. |
No, for qualifying distributions. For non-qualifying distributions, only the earnings
portion is taxable. |
| 10% penalty on early distributions |
Yes, the penalty applies to taxable distributions if you
are under age 59½ and do not qualify for an exception. |
No, for qualifying distributions. For non-qualifying
distributions, the penalty may apply to the earnings
portion. |
| Includable in taxable estate of IRA owner at death |
Yes |
Yes |
| Beneficiaries pay income tax on distributions after IRA owner's
death |
Yes, to the extent that a distribution represents
deductible contributions and investment earnings. |
Generally no, as long as the account has been in
existence for at least five years. |
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Borrowing from an IRA |
| Loans
are not permissible from a traditional IRA or a Roth IRA. However,
if you qualify, you may move your traditional IRA pre-tax
contributions into a 403(b) or self-employed 401(k) with loan
features and borrow up the lesser of $50,000 or half of your account
balance (see Loans). |
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| Rolling Over
Your 401(k) to an IRA and to a Roth IRA |
You can move your traditional
IRA and other qualified retirement funds into a Roth IRA for that
tax-free treatment, provided that your adjusted gross income (AGI)
is $100,000 or less. Moreover, there is no limit on the amount that
you can rollover to a Roth IRA. Keep in mind that it is only after
your funds are invested or rolled over into a Roth IRA that your retirement
nest egg grows thereafter tax-free. Caution: The amount transferred from your traditional IRA to your
Roth IRA is taxable, but it is not subject to the 10% early withdrawal
penalty. So, before transferring your traditional IRA or other retirement
funds to a Roth IRA, it is advisable to consult with your accountant
about the tax pluses and minuses of converting your retirement funds
to a Roth IRA. If you find that you can not afford to pay the tax
associated with the conversion of all your funds you may want to
convert only a portion of your funds so that your taxes will on
only be for the portion that is converted.
Check out our Roth
IRA Conversion Calculator for quick guide as to whether it makes
sense to convert to a Roth IRA.
To Rollover into an IRA or Transfer
your IRA go to Quick
Rollover. Once your funds are in the IRA you may request that
your IRA be converted to a Roth IRA. |
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| No Penalty For
Some Roth IRA Early Withdrawals |
| Under special circumstances you
can withdraw funds from your Roth IRA before you reach age 59½
without paying taxes or a penalty. How? Your Roth IRA funds must be
at least five years old. Also, the money you withdraw must be used
specifically in cases of disability, death, or the purchase of a first
home ($10,000 lifetime limit) for you or your immediate family. Consult
your prospectus to see if other fees may apply. |
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| Estate Tax Advantage
with Roth IRA |
| While both IRAs are subject to
estate taxes, the beneficiaries of Roth IRAs will not have to pay
income taxes on their Roth IRA distributions. That is not the case
with other retirement monies received by beneficiaries. Therefore,
if you are looking for a tax-advantaged way to accumulate assets for
heirs a Roth IRA may be a better alternative. |
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| Stretch IRA |
Stretch IRAs,
a.k.a. legacy IRAs, multigenerational IRAs, allow the beneficiary of
an IRA to "stretch" the period of time that earnings within the
inherited IRA (traditional or Roth) can grow tax deferred. With a "stretch" IRA, a beneficiary is able to take distributions from
an inherited IRA over his or her own life expectancy.
The
beneficiary may also get to name a successor beneficiary to continue
to receive the annual distributions should the original beneficiary
die with funds still in the inherited IRA. Thus, a Stretch IRA can
grow tax-deferred beyond the lifetime of the person who established
the IRA for the benefit of multiple beneficiaries who may span several
generations.
Not all IRAs allow you to stretch. Ask
your broker if yours does. To transfer your IRAs to one with
stretch feature get a Rollover IRA kit. |
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