Hocking Valley Bank Comprehensive Planning

Roth IRAs

A Roth individual retirement account (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings.

For 2008 and 2009, you can contribute up to the lesser of $5,000 or 100% of your taxable compensation to a Roth IRA. In addition, individuals age 50 or older can make an extra "catch-up" contribution of up to $1,000 for both years. Contributions to a Roth IRA are not tax-deductible, but the funds grow tax-deferred and distributions are tax-free under certain conditions.

Prerequisites

You have taxable compensation (i.e., wages, self-employment income) during the year of the contribution.

Your modified adjusted gross income (MAGI) must be within the allowable limits

Key strengths

Qualified distributions are completely tax-free and penalty-free.
You can contribute after age 70½ as long as you have taxable compensation.
You have flexibility in withdrawing your funds prior to retirement.
You are not required to take any distributions while you are alive.
Contributions can be made even if you are covered by an employer-sponsored retirement plan.
Roth IRAs offer a wide range of investment choices.

Key tradeoffs

You receive no tax deduction when you make a contribution.
If a withdrawal does not qualify for tax-free status, the portion that represents earnings is subject to federal income tax (and perhaps an early withdrawal penalty if under age 59½).
Special penalty provisions may apply to withdrawals of Roth IRA funds that were converted or rolled over from a traditional IRA, SEP IRA or SIMPLE IRA.
There is always the possibility that the law will change in the future.

Comparison of Traditional IRAs and Roth IRAs

	Traditional IRA	Roth IRA
Maximum yearly contribution (2008 and 2009)	Lesser of $5,000 or 100% of earned income ($6,000 if age 50 or older)	Lesser of $5,000 or 100% of earned income ($6,000 if age 50 or older)
Income limitation for contributions	No	Yes
Tax-deductible contributions	Yes. Fully deductible if neither you nor your spouse is covered by a retirement plan. Otherwise, your deduction depends on your income and filing status.	No. Contributions to a Roth IRA are never tax-deductible.
Age restriction on contributions	Yes. You cannot make annual contributions beginning with the year you reach age 70½.	No
Tax-deferred growth	Yes	Yes; tax-free if you meet the requirements for a qualified distribution.
Required minimum distributions during lifetime	Yes. Distributions must begin by April 1 following the year you reach age 70½.	No. Distributions are not required during your lifetime.
Federal income tax on distributions	Yes, to the extent that a distribution represents deductible contributions and investment earnings.	No, for qualified distributions. For nonqualified distributions, only the earnings portion is taxable.
10% penalty on early distributions	Yes, the penalty applies to taxable distributions if you are under age 59½ and do not qualify for an exception.	No, for qualified distributions. For nonqualified distributions, the penalty may apply to the earnings portion. (Special rules apply to amounts converted from a traditional IRA to a Roth IRA.)
Includable in taxable estate of IRA owner at death	Yes	Yes
Beneficiaries pay income tax on distributions after IRA owner's death	Yes, to the extent that a distribution represents deductible contributions and investment earnings.	Generally no, as long as the account has been in existence for at least five years.

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