roth IRAs Have An Edge Over Regular Ones Appeal To Wealthy: Taxed Going In,
Tax-Free Coming Out
Date: 10/31/97
Author: Grace W. Weinstein
Individual retirement accounts haven't been very attractive in recent years. Contributions
are limited to $2,000 a year. And those
contributions are fully deductible in 1997 only for certain taxpayers.
To take a full deduction for '97, people can't be covered by any other pension plan, or
must meet an income test. The earnings
cap is $25,000 for single taxpayers and $40,000 for married couples filing jointly.
Come January 1998, though, it's a whole new ball game. New rules for the standard IRA
make it a better retirement planning tool
for more people. And a brand new ''Roth IRA,'' named for Sen. William Roth, R-Del.,
provides an attractive alternative.
For most people, especially higher-income taxpayers, the new Roth IRA wins hands
down. Compare the features of the standard
IRA with those of its new cousin to see which is best for you.
The big news in terms of the standard IRA is that more people will qualify for deductible
contributions. For '98, singles earning
$30,000 and married couples with adjusted gross income up to $50,000 will be able to
make deductible contributions. By 2007,
the limits will reach $80,000 for singles and $100,000 for married folk.
If you can make deductible contributions, and if you expect to be in a much lower tax
bracket after you retire (when withdrawals
will be taxed as ordinary income), the traditional IRA may still be your best bet.
For many taxpayers, however, the Roth IRA is a clear winner.
''It's a slam-dunk,'' said Seymour Goldberg, an attorney and CPA in Garden City, N.Y.,
and the author of ''J.K. Lasser's How To Pay
Less Taxes On Your Retirement Savings.''
Big-Time Benefits
Three big-time benefits are built in to the Roth IRA.
First, income ceilings are considerably higher than on the traditional IRA. Full $2,000
annual contributions may be made to a Roth
IRA with income of up to $95,000 for singles and $150,000 for married couples.
Contributions phase out at income of up to
$110,000 for singles and $160,000 for married couples.
Second, while contributions are never deductible with these new IRAs, withdrawals are
never taxed so long as you are at least
age 59 1/2 and the money has been left in place for five years.
''Prepaying the taxes by not having the deduction upfront gives you a more valuable
stream of income in the future,'' said Steve
Lockwood, president of Lockwood Pension Services in New York.
You can always take out the money you've put in. And, in a gift to taxpayers, Congress
decreed that withdrawals are always
considered to be your money first. Income tax and a 10% penalty for early withdrawal
apply only to earnings over and above your
own contributions.
And, third, there is no required beginning date for distributions. You can open a Roth
IRA after age 70 1/2, or continue
contributing to one you opened earlier. You can even leave the money in place until you
die.
This means, said Goldberg, that ''the Roth IRA is probably the most sophisticated of all
estate planning techniques.'' It lets you
pass money down to your children and grandchildren with ongoing tax-free growth.
Another Advantage
For higher-income taxpayers who expect to be making IRA withdrawals while receiving
Social Security benefits, the Roth IRA
yields another advantage. Tax-free withdrawals from a Roth IRA, unlike withdrawals
from a regular IRA, won't count as income in
determining whether Social Security benefits will be taxed, according to the Institute of
Certified Financial Planners.
So the Roth IRA is far more flexible than the traditional model. Some observers think it
may be too good to last.
''If too much money builds up in the tax-free Roth IRAs, it's always possible that
Congress will find a way to tax the Roth IRAs in
the same way that they came up with the excise tax for people who had too much
money in their IRAs,'' warned Ed Slott, a CPA
in Rockville Centre, N.Y. Slott is the author of ''Your Tax Questions Answered.''
Or, as Slott put it, ''Do you trust Congress?'' |
