Roth IRA BasicsTax Professionals' Resource
October 17, 2012 — 1,189 views
Roth IRA Basics
With less than one-fifth percent of American employers today offering their employees a traditional pension plan, many of your clients will be left to plan for their retirements on their own. Clients who own their own business, are self-employed, or who work for one of the ten prevent of American companies that offer no type of retirement plan will also need to be steered towards a tax-advantaged account such as a Roth IRA in order to save for their own retirement.
Roth IRA accounts were created by Congress in order to help middle class investors save for their own retirement. Over the past several years, the rules have been modified to allow funds from these accounts to be withdrawn once in order to purchase the account owner’s first primary residence, and also to help pay for higher education expenses at accredited universities and colleges. Withdrawals for these items are not subject to taxes or tax penalties.
Any individual is allowed to deposit up to $5000 a year into a Roth IRA. Persons over the age of 55 are allowed to deposit $5500. All contributions are considered to be taxable at the person’s normal federal income rates. There is a tax credit designed to incentivize savers making below about $50,000 a year (the exact number is adjusted by Congress annually), but the maximum credit is $200 for a $5000 contribution.
All money deposited into a Roth IRA can grow tax-free, regardless of what it is invested in. There are very few restrictions on where money within a Roth IRA can be invested, and most investment classes are permissible. The exact allocation of investments is up to the account holder, and investments within a Roth IRA can be bought and sold without any penalty or limits.
In addition to withdrawing funds for the purchase of the first primary residence or higher education, the original contributions to the Roth IRA can be withdrawn at any time without penalty. Withdraw of additional earnings before the account owner turns 59 1/2 , however, will incur a penalty of ten percent of the withdrawn amount plus regular taxes. Other than this, however, all money taken out of a Roth IRA is not subject to federal taxes.
Once the owner of the account turns 59 ½ he or she does not have to make mandatory withdraws as is the case with a traditional IRA.