Roth Ira

The Roth IRA is only one type of individual retirement arrangement (IRA). It is the most attractive to those who belong to the higher income brackets and thus do not fall within the income ceilings established in other IRAs.

There are IRAs that are based primarily on employer plans. These are called Simplified Employee Pensions (SEPs or SEP IRAs) and Savings Incentive Match Plans for Employees (SIMPLEs or SIMPLE IRAs). There are employer plans that formally are not IRAs and are called Deemed IRAs.

An account or annuity should be designated as a Roth IRA when it is set up, to be officially recognized as a Roth IRA. A deemed IRA can be a Roth IRA, but a SEP IRA and a SIMPLE IRA cannot be so designated. A Traditional IRA is any IRA that is not Roth IRA or SIMPLE IRA.

You can rollover (convert) a traditional IRA to a Roth IRA. But for employer plans, the rule is that direct rollover to a Roth IRA is not permitted.

If you have several types of IRAs, the total contributions you can make to all types is $4,000 (if you are age 49 and below) and $5,000 (if age 50 and above) in year 2006 and 2007. In year 2008, the maximums will be $5,000 and $6,000, respectively. Beginning in 2009, a yearly increase of $500 to each category will be allowed.

The main filter to a Roth IRA is the modified adjusted gross income (AGI). You can compute your modified AGI for Roth IRA purposes. If you look at your tax return, there is a figure called the adjusted gross income, and that figure can be modified as follows:

1. Subtract the following: conversion income, which represents any income that comes from the conversion of an IRA (that is not a Roth IRA) into a Roth IRA; and, the minimum required distributions from any of your qualified retirement plans, including IRAs (for conversions only); 2. Add the following: your traditional IRA deduction, if any, student loan interest deduction; tuition and fees deduction; foreign earned income exclusion; foreign housing exclusion or deduction; exclusions of qualified bond interest and employer-provided adoption benefits; and domestic production activities deduction.

You cannot contribute to a Roth IRA if you are single and your modified AGI exceeds $110,000 or if you are married (filing jointly), and the figure exceeds $160,000. That income level is the cut-off. Even if you do qualify, your contribution limit may be reduced if your modified AGI exceeds certain specified amounts ($95,000 for single and $150,000 for married filing jointly), and gradually phases out as you approach the ceiling.

With very few exceptions, a Roth IRA allows you to grow income that is no longer taxable when you retire. If you are in a lower tax bracket now but expect (naturally) to be in a higher bracket at retirement, the Roth IRA gives you a tax advantage. But the biggest benefit of Roth IRA is that there is no forced distribution: you can keep your money in a Roth IRA to earn tax-free income even if you have already reached age 70 ½. Even when you're much older, your Roth IRA can continue to work for you.