All About Roth

Roth IRA is my favorite type of retirement plan.

Roth IRA was established by the Taxpayer Relief Act of 1997, and in my opinion, one of the greast offers that the government provides for tax payers. Your contribution is after-tax, and your earnings are tax-free at distribution. Everyone should have a portion of their retirement in Roth IRA in my opinion. The tax-free distribution gives retiree flexibility in tax planning as it provides an additional source of retirement funding.

Simple Example: Retiree Dave receives $1,500 a month in Social Security Income. He needs $3,500 a month to support his retirement needs. Therefore, he has to withdraw $2,000 a month from his retirement accounts, he has IRA roll-Overed from previous 401k, also has Roth IRA that he had contributed to throughout his working years.

total income (as described in my SSI article)= 24,000 + 18,000/2 = 35,000 which will make 85% of Dave's SSI taxable, in addition to his IRA withdrawal being taxable.
Now, since Dave has Roth IRA, he didn't have to get all of $2,000 from the Rollover IRA, part of that could come out of his Roth. We're trying to keep his 'total income' less than 25,000 to avoid paying SSI taxes. 25,000-9,000 (half of SSI) = 16,000, this is the amount that could come out of Rollover IRA without triggering the SSI tax alarm. The other 8,000 could come out of his Roth and completely tax free.

There is a couple of income limit on eligibility of Roth IRA contribution. The Roth IRA Modified Adjusted Gross Income (MAGI) rule:

Must have Earned income (Income from investment does not count)

Modified Adjusted Gross Income (MAGI) limit:

Filing Status	Full Contribution	Partial Contribution (phase out)
Single	Up to $112,000	$112,000 - $127,000
Married File Jointly	Up to $178,000	$178,000 - $188,000
Married File Separately	$0	$0 - $10,000

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Clearly, the Roth plan doesn't work too well for people who are married and file separately. Some of the major advantages and disavantages about Roth IRA:

Major Advantages: (as compare to a Traditional IRA)

Contribution amount can be withdrawal at any time, tax and penalty free! (great for unexpected large medical cost, or big plan to go to grad school)
Earnings can be distributed after 5 years from contribution and owner be 59.5 years or older.
No required distribution based on Age!
Assets in Roth IRA can be passed to heirs who can take tax-free distributions!

Potential Disadvantages:

If you believe your tax rate at retirement will be lower, you shall NOT choose Roth, use Traditional instead.
The uncertainty of future tax rate is one of the biggest reason that turns investors away. Investor chose Traditional IRA, because tax deductible benefit is immediate.