Hi friends and welcome back to the IRA series, where I have been talking about the different types of retirement accounts that you can choose from. Having the knowledge about which type of retirement account can be beneficial to you depending on your specific needs. Each type will have its own advantages and disadvantages. Through this blog post, I will help you come to understand if the Roth IRA is the best choice for you. With so many options to choose from, you will want to make sure that you are in the right retirement account that is best for your specific situation and without someone who is looking to profit off of getting you into that account. I am here for you and to guide you along the way with information you can trust. Let’s get down to business.
A Roth IRA, my friends is literally the same thing as your Traditional IRA, with a couple of exceptions of course. The first exception to the Roth IRA is that the contributions are not deductible. So, you will pay taxes on any money you put into the account.
Another difference between a Roth and Traditional IRA is that if certain requirements are met, then your distributions could be tax free. You could potentially end up keeping more money because you won’t have to pay fees or penalties when taking your money out. This fact alone makes the Roth retirement account a very interesting way to grow your money.
Additionally, the required minimum distribution (RMD) rules don’t apply so that means you don’t have to take any distributions if you don’t want to and you will not face a penalty for doing so. However, should the owner of the ROTH IRA die, then the beneficiary will be subjected to the required minimum distribution rule.
Another thing that is a major difference between the Traditional and Roth IRA, is that if your modified adjusted gross income (MAGI)is what determines how much if any you can contribute to your ROTH IRA and whether or not you can take on certain deductions. OK, this sounds interesting, but what the heck is MAGI?
MAGI is just a fancy term for your household adjusted income with any tax-exempt interest income. Once you do your calculations, it is possible and it is perfectly within the normal range for the MAGI and the adjusted gross income (AGI) to be fault similar. Now we are cooking right? Well in order to calculate your MAGI, you would have to take your adjusted gross income and subtract any income you received from a rollover or a conversion, from the qualified retirement account and that would be your magic number. The only catch to MAGI is that, the more income you make the less you will be able to contribute to your ROTH retirement account.
Also, depending on how you are filing, if you make above a certain amount then you will not be able to contribute anything at all. The limits are different based on your tax filing status. For those folks who are married and filing jointly, the limit is $206,000 and for those who are single, the limit is $139,000.00. This fact alone should be strongly considered when looking into the ROTH IRA, as it could potentially not be available to you because of your income bracket. Moving on to more differences between the Roth and the Traditional IRA, is that the contributions are able to phaseout. When they phaseout, this means that the contributions will decrease when the modified adjusted gross income is within certain amounts and it will be based on the filing status of the taxpayer.
The ROTH and the Traditional IRA also share the same contribution limits, which are based on the taxpayer’s age; under 50 then the limit is $6,000 and over 50 and the limit is $7,000. The same rules apply for the ROTH IRA when an individual uses the income of a spouse to qualify for the spousal IRA deduction.
The biggest takeaway about the distinction from the ROTH IRA and the Traditional IRA is the way that both accounts are taxed. For the ROTH retirement account, a person will be taxed on the money that they put into the account, but all future withdrawals will be virtual tax free because you have already paid the taxes on the money when you put it into the account. This type of retirement account will work well for you if you believe that your taxes will be higher later on in life when you retire.
Looking at the ROTH IRA as compared to other retirement accounts it is much less restrictive in how you can contribute because you are able to continue contributing as long as you like, up to any age as long as you are within your filing limits including the MAGI. You can also make contributions via your typical avenues such as, cash, check, transfer, rollovers and conversions.
Still seems like a lot of information to digest? It is and I don’t blame you one bit for not feeling absolutely one hundred percent ready to dove in on your own. That’s why I would highly suggest getting a CPA or tax strategist such as myself a ring to thoroughly break down the ins and outs of these different retirement accounts. The worst thing you want to do is to be put into the wrong account and not have it work for you or you not have any type of understanding of how to contribute or take distributions from your money. Why go through that if you don’t have to. Simply reach out to me for a consultation and I would be more than happy to set you on the right path, without any bias.
Are you looking for more information about Roth IRA? Contact Accolade Accounting, a full-service accounting and advisory firm in Decatur, GA serving Atlanta and nearby areas. We specialize in accounting, business taxation, tax planning, and advising. A team of business tax advisors at Accolade Accounting takes a holistic approach to tax preparation and provides specialized tax planning and advising to clients. Call us at +1 470-646-2663 or drop an email at info@accoladeaccounting.com for a free consultation.
Well, my friends, please come back to join me on another blog post as I discuss SEP and the Simple IRA.
Until next time,
Cheers!
JD Longino, CPA
