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Roth IRAs
The Roth IRA, referred to as the back-ended IRA because the tax benefits are not received up front like they sometimes are with a Traditional IRA, is similar to a traditional IRA in many respects. There are, however, also marked differences. Some of these are the following:
You are able to fund your Roth IRA even after attaining the age of 70 ½.
You are not required to start distributing assets when you reach age 70 ½. (For traditional IRAs, when you reach the age of 70 ½, you must start taking required minimum distributions from the account.)
You cannot take a deduction on your income tax return for
contributions made to your Roth IRA.
The Farmers Roth IRA allows you to buy an Individual Retirement Annuity with after-tax dollars now and withdraw principal and earnings tax-free after five years. You can withdraw funds after age 59 1/2, or sooner to pay for qualified educational expenses or the purchase of a new home.
Broader eligibility requirements
There is no age limit for making contributions to a Roth IRA. You must have earned income equal to the amount of your contribution, up to $3,000 annually for an individual or a combined $6,000 for a couple. Contact your local Farmers agent for more details.
Limits on contributions
If your adjusted gross income exceeds $150,000 and you file jointly ($95,000 for single filers), the amount you may contribute is gradually reduced and phased out. The combined total of IRA and Roth IRA accounts cannot exceed the maximum annual contribution of $3,000 per individual. The Roth IRA must be kept in a separate account.
Qualified distribution
Under certain conditions, you can withdraw from your Roth IRA without paying taxes or penalties. First, you must wait five years after the first tax year in which you made contributions. Second, you must have reached the age of 59 ½ or the withdrawals must be due to:
Disability
First home purchase
Death
Non-qualified distribution of earnings is taxable income and can be subject to a 10 percent Internal Revenue Service penalty tax.
The Choice
Making the choice between a Traditional and a Roth IRA is not a difficult one. The factor that you will most consider is the timing of the income tax benefit. With a Traditional IRA, the tax benefit is usually taken when the contribution is made to the IRA. For the Roth IRA, because you cannot take a tax deduction for the contributions made, qualified distributions are tax-free. If you are unable to take a
deduction for a contribution made to a Traditional IRA, it may make better sense to contribute to a Roth IRA instead. Your financial advisor may even decide that a combination of both is in your best interests. Should you decide later that you contributed to the wrong type of account, you can always change you mind and move the contributions to the other type of IRA. This is referred to as a
"re-characterization." Should you decide to re-characterize your IRA contribution, you must contact your IRA custodian to determine their documentation and
procedural requirements.
To ensure that your decisions are financially sound, you should consult with your financial advisor. Your financial advisor not only will help you chose the IRA that is better suited for your financial profile, but also may help you make other critical financial decisions to ensure your retirement years are financially secure.
Our agency offers Roth IRA's--would you like more information?
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