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Roth IRA plan is a specialized form of Individual Retirement plan which is covered under the tax law of the US. It is named after the late senator of Delaware, William Roth. The Roth IRA
retirement plan is a modified version of the traditional IRA plan and was established under the Taxpayer Relief Act that was made in the year 1997.
Those who are covered under the Roth IRA are allowed to invest in various financial channels such as stocks, securities, mutual funds and so on. In order to invest, you need to follow certain terms and conditions as set by the Internal Revenue Service or IRS.
Benefits
One of the main benefits of the Roth IRA is the structure of taxation. You can manage the account in a number of ways and yet enjoy various tax exemptions and benefits. The plan is not deductible and the money that you contribute to the account is tax deferred. The tax rates are only applicable if you withdraw the money from the account.
The direct contributions that you make to the Roth IRA account can be withdrawn without any taxes. The converted contributions that you hold in the account can be withdrawn free of penalty after the seasoning period is over. Presently the seasoning period is 5 years.
One can make contributions to the Roth IRA plan even if he or she is covered under some other
retirement plans like
401(k) .
In case of the death of the owner of the account, it is passed on to the spouse, who is the main beneficiary. If the spouse also has a separate Roth IRA account, he or she can combine both the accounts to earn more benefits.
Compared to the Social Security benefits, the assets that are invested in the Roth IRA account are passed on to the beneficiaries and the heirs.
In case of large estates, the owners can opt for the Roth IRA plan. It reduces the rate of the estate taxes as a portion of your earnings have already been deducted.
The limits of income
There are some income limits that are applicable for making a Roth IRA account. They are: -
If you are filing singly, you need to have income up to $105,000 for a full contribution.
- For joint filers, the limit can go up to $166,000 in order to qualify for a full contribution and between $166,000 and $176,000 for a partial contribution.
Funding a Roth IRA
You can fund your Roth IRA in two ways: contributing directly to the plan or converting a part or full amount of the traditional IRA to the Roth IRA. You can directly contribute to the account according to the “modified adjusted gross income,” or MAGI.
You can convert the traditional IRA to Roth IRA irrespective of the amount of MAGI. However, for that, you need to pay an income tax during the conversion process on the portion of the
traditional IRA which is taxable.
A number of factors such as the income tax rate, the period of the Roth IRA and the state laws determine your payment procedure to the account.
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