The primary difference between a Roth IRA and a Traditional IRA is that a Roth allows you to accrue earnings on a tax-deferred basis, but you are unable to deduct contributions on your federal income taxes. A Traditional IRA may allow you to deduct contributions on your income tax return, but you will be required to pay taxes when you make qualified withdrawals.
When funds are withdrawn from a Roth IRA, the earned interest is tax-exempt as long as the Roth holder meets certain criteria at the time the funds are taken out. There are however, some restrictions and disadvantages to Roth IRAs.
Contribution Cap
The annual amount you can contribute to a Roth IRA is based solely on the adjusted gross income that is listed on your federal income tax return. At the time of this writing, your yearly contributions to a Roth IRA cannot exceed $5,000 ($6,000 over age 50) or 100 percent of your earned income, whichever amount is less.
Income Restrictions
Individuals and married filers who exceed certain income levels may have partial restrictions or have annual earnings that exceed the allotted amount to quality for a Roth IRA.
For example, according to figures released by State Farm, a single person who earned more than $120,000 in 2009 is ineligible for a Roth IRA. A single person who earns between $105,000 and $120,000 is permitted to make only a partial contribution. The maximum earnings allowed for a married couple filing a joint tax return to open a Roth IRA is $177,000.
Not Tax-Deductible
The contributions you make to a Roth IRA investment vehicle are not tax-deductible. That means you are unable to lower your federal income taxes for the year you make the contribution.
Early Withdrawal Penalty on Earnings
While earnings from a Roth IRA can be withdrawn tax- and penalty-tax free if it has been in existence for a minimum of five years, your reason for withdrawal must meet certain criteria. This includes reaching age 59½, becoming disabled, dedicating the funds to finance the cost of your first home, and your death. Otherwise, the Internal Revenue Service can impose a 10 percent penalty tax on certain early distributions (withdrawal prior to age 59½).
Member Comments