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Your Bank > Education and Advice > CNB University

The Roth IRA - Is it the Right Plan For You?

In case you haven’t heard, investing in a Roth IRA plan offers you a unique saving advantage. Instead of delaying federal income taxes until earnings and tax-deductible contributions are distributed, a Roth IRA makes future IRA growth tax-free if all requirements are met.

Unlike a Traditional IRA, Roth IRA contributions are not tax deductible. An individual may contribute up to $5,000 ($6,000 if age 50 or older)* each tax year to a Roth IRA, but eligibility to contribute phases out between $166,000 and $176,000* of modified adjusted gross income (MAGI) for joint filers and between $105,000 and $120,000* for unmarried filers.

Tax Advantages

A main attraction of the Roth IRA is that distributions of your basis (contributions made into the account) are tax and penalty free. A distribution of account earnings that occurs after a five-year waiting period will be tax and penalty free if paid: (1) when you are age 59½ or older, (2) if you become disabled, (3) if you die, or (4) if you use the money for qualifying first-time home buying expenses ($10,000 lifetime cap). A distribution of account earnings taken out prior to satisfying the five-year waiting period will be taxed and may also be subject to a penalty.

Required Minimum Distributions (RMDs) which apply to Traditional IRA owners after reaching age 70½ do not apply to Roth IRAs. During your lifetime, you never have to start taking RMDs. However, after your death, your beneficiary(ies) will have to start taking RMDs. The funds will still be tax-free to your beneficiary(ies) as long as they are distributed after your account has satisfied the five-year waiting period.

There is no age limit for making contributions to a Roth IRA. You can make annual, nondeductible contributions at any age, as long as you have earned income.

Tax Due on Conversion

The opportunity for tax-free growth may lead you to consider converting your existing Traditional IRA to a Roth IRA. Tax law lets you convert any traditional IRA amount to a Roth IRA as long as your MAGI does not exceed $100,000 and if married, your tax filing status is not "married filing separately". If you convert you will have to pay the income taxes your Traditional IRA has deferred, although the 10% penalty for early distribution does not apply.

Beginning January 1, 2010, the eligibility requirements for converting from a Traditional IRA to a Roth IRA will be eliminated. This means that your MAGI and your tax filing status will not be taken into consideration when converting. Also, if you decide to convert your Traditional IRA to a Roth IRA in tax year 2010, for that tax year only, unless you elect otherwise, you will be able to pay the income tax due on the amount converted over a two-year period; half reported in 2011 and half reported in 2012.

If you are thinking about converting a Traditional IRA to a Roth IRA, consider whether paying tax now will benefit you later when you withdraw funds from the Roth IRA. Your answer will depend on your individual situation.

* Contribution and MAGI Income Limits are for the 2009 tax year and may be increased based on cost of living adjustments after tax year 2009.