Both traditional IRAs and Roth IRAs have the same annualcontribution limit: a maximum of $4,000 for the years 2005 through2007. The amount will increase to $5,000 per person in 2008. Butthat’s where the similarities end. Unlike traditional IRAs,contributions to a Roth aren’t tax deductible. Money invested growstax-deferred, but, unlike traditional IRAs, all withdrawals afterage 59 1/2 are tax free, provided the Roth has been open for atleast five years. If you’re choosing between saving for retirementor for the down payment on your first house, all earnings andinterest up to $10,000 on your Roth can be distributed tax free topurchase that home if withdrawals occur after five years,regardless of your age.
If you have a traditional IRA, someday, you’ll be faced withmandatory distributions. The Roth IRA does away with thateventuality. Your money can grow tax free forever–possiblyproviding a lovely nest egg for you to pass on to youroffspring.
Before you decide to rush out and open a Roth, there’s more tothe story. If you’re hoping to roll money directly from a 401(k)plan to a Roth, you can’t–without a penalty. What you can do isroll it over to a regular IRA and then convert that account to aRoth. To qualify for the conversion, your adjusted gross incomemust be less than $100,000. Since money that goes into a Rothaccount must be after-tax money, you must pay tax on the money thatwill be converted.
To qualify for Roth IRA contributions, a single person’sadjusted gross income (AGI) must be less than $95,000, withbenefits phasing out completely at $110,000. For married couplesfiling jointly, the AGI must be less than $150,000. Thecontribution amount is decreased by 30 percent (35 percent if 50 orolder) until it is eliminated completely at $160,000 for jointfilers.
