how an ira will benefit me?

Question

what will be the tax advantege if i get a roth ira?

Answer 1

Traditional IRA
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A Traditional IRA saves you tax dollars today. The amount you put into the IRA lowers your adjusted gross income dollar for dollar thereby lowering your taxes (in most cases). The IRA grows tax-deferred. What does that mean? You don't have to include any interest, dividends, or gains in the account each year like you have to do for normal accounts. When you finally pull out the money, it is considered income in the year withdrawn. You may not even be taxed on the amount if your total income is below your deductions.

Exception 1: Sometimes contributions to your Traditional IRA can NOT be deducted on your tax return. It depends on whether the "Retirement plan" box in box 13 on your W-2 is checked. If you are single and this box is not checked, or if you are married and both you and your spouse’s boxes are not checked, you can make the deduction. If the box is checked, it depends on your income. I won't go into it here, but basically if you earn a lot of money and your box is checked, the IRA can still be funded, but you can't get the deduction. If you do fund your IRA without taking the deduction, be sure to fill out form 8606. This form keeps track of your post-tax contributions or "basis" to your IRA so you don't pay tax on that amount when it is eventually withdrawn.

Exception 2: If you pull out the money before the year in which you reach 59 1/2, you may be subject to an additional 10% penalty (as well as having to include the amount as income). There are exceptions to the penalty like excessive medical costs, first time home purchase, death, disability, and education expenses, but there are no exceptions to the fact that the amount is considered taxable income in the year it is pulled out.

Roth IRA
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A Roth IRA does NOT save you tax dollars today, nor do you need to include it anywhere on your tax return. However, like a Traditional IRA, the money in the account grows tax-deferred. The good thing is, when you take the money out, you do NOT have to include it as income. You must wait until the year you turn 59 1/2 and the account must be open for at least 5 years. If you pull out your EARNINGS before this, you have to claim them as income AND pay the 10% penalty. You can always pull out your CONTRIBUTIONS tax-free, penalty-free at any time for any reason.

CONTRIBUTIONS - amount you put into the Roth

EARNINGS - amount of gains the Roth had above and beyond your contributions

Exception 1: You can pull out the earnings and avoid the 10% penalty for the same reasons as the Traditional IRA above. It is still income, but there is no 10% penalty. Amazingly, you don't even need to include the earning pull-out as income if the account has been opened for 5 years and you used the earnings for a first-time home purchase. There is a lifteime max for this of $10,000. Remember, the earnings are subject to taxes, never the contributions. So, if you pull out $30,000 for a home and $20,000 of it is your contributions and $10,000 is earnings, it is all tax-free, penalty-free.

There are income limitations to being able to fund the Roth. Basically, if you are single, you're AGI must be less than $110,000. If you are married, it must be less than $160,000.

If you have to choose between a Roth and a post-tax Traditional, always choose the Roth. If you have to choose between a pre-tax Traditional and Roth, is isn't as easy to decide. It may be best to see a financial planner. I suggest having both types of accounts. Then, when you retire, you can pull out of the Traditional until you hit your deduction limit, then pull the rest out of the Roth. That way, you won't have to pay any taxes.

One more thing, putting money into either Roth or Traditional or a company sponsored plan like a 401(k) may qualify you for a Retirement Savers Credit . Your income needs to be less than $50,000 if married, $37,500 if Head of Household, or $25,000 if single to qualify for the credit.

Oh yea, one final thing, contributions to the Traditional IRA not only lower your taxable income, they lower your AGI which can benefit you in other ways. For example, the lower your AGI, the more medical expenses you qualify for on your Schedule A.

Hope this helps :)

Answer 2

That depends on how much you make now (what tax bracket you are in) and how much you plan to be making when you start receiving payments from the IRA. You invest money that is already taxed, so that when you take it out later down the road, you will not be taxed on it again.

Simply put: If you plan to be in a higher tax bracket when you cash in on your IRA, Roth is a good idea.

Also, you are not forced to start making withdrawals at age 70 1/2, like other plans.

Answer 3

By enabling you to save pretax dollars, earn tax deferred interest, then get taxed later when you make withdrawals and your tax rate is lower.

Answer 4

Direct contributions to a Roth IRA may be withdrawn tax and penalty free at any time. Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty free after the "seasoning" period (currently 5 years). Earnings may be withdrawn tax and penalty free after the seasoning period if the condition of age 59½ (or other qualifying condition) is also met. Distributions from a Roth IRA do not increase Adjusted Gross Income. This differs from a traditional IRA where all withdrawals are taxed as Ordinary Income, and a penalty applies for withdrawals before age 59½. In contrast, capital gains on stocks or other securities held in a regular taxable account for at least a year would be taxed at the lower long-term capital gain rate. This potentially higher tax rate for withdrawals of capital gains from a traditional IRA is a quid pro quo for the deduction taken against ordinary income when putting money into the IRA.

Up to a lifetime maximum $10,000 in earnings withdrawals are considered qualified (tax-free) if the money is used to acquire a principal residence for the Roth IRA owner. This principal residence must be acquired by the Roth IRA owner, their spouse, or their lineal ancestors and descendants. The owner or qualified relative who receives such a distribution must not have owned a home in the previous 24 months.

Contributions may be made to a Roth IRA even if the owner participates in a qualified retirement plan such as a 401(k). (Contributions may be made to a traditional IRA in this circumstance, but they may not be tax deductible.)

If a Roth IRA owner dies, and his/her spouse becomes the sole beneficiary of that Roth IRA while also owning a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into a single plan without penalty.

If the Roth IRA owner expects that the tax rate applicable to withdrawals from a traditional IRA in retirement will be higher than the tax rate applicable to the funds earned to make the Roth IRA contributions before retirement, then there may be a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle while working. There is no current tax deduction, but money going into the Roth IRA is taxed at the taxpayer's current marginal tax rate, and will not be taxed at the expected higher future effective tax rate when it comes out of the Roth IRA. There is always risk, however, that retirement savings will be less than anticipated, which would produce a lower tax rate for distributions in retirement. Assuming substantially equivalent tax rates, this is largely a question of age. For example at the age of 20, one is likely to be in a low tax bracket, and if one is already saving for retirement at that age, the income in retirement is quite likely to qualify for a higher rate, but at the age of 55, one may be in peak earning years and likely to be taxed at a higher tax rate, so retirement income would tend to be lower than income at this age and therefore taxed at a lower rate.

Assets in the Roth IRA can be passed on to heirs.

The Roth IRA does not require distributions based on age. All other tax-deferred retirement plans, including the related Roth 401(k), require withdrawals to begin by April 1 of the calendar year after the owner reaches age 70½. If the account holder does not need the money and wants to leave it to their heirs, a Roth can be an effective way to accumulate tax-free income. Beneficiaries who inherited Roth IRAs are subject to the minimum distribution rules.

Roth IRAs have a higher "effective" contribution limit than traditional IRAs, since the nominal contribution limit is the same for both traditional and Roth IRAs, but the post-tax contribution in a Roth IRA is equivalent to a larger pre-tax contribution in a traditional IRA that will be taxed upon withdrawal. For example, a contribution of the 2008 limit of $5,000 to a Roth IRA may be equivalent to a traditional IRA contribution of $6667 (assuming a 25% tax rate at both contribution and withdrawal). In 2008, one cannot contribute $6667 to a traditional IRA due to the contribution limit, so the post-tax Roth contribution may be larger.

On estates large enough to be subject to estate taxes, a Roth IRA can reduce estate taxes since tax dollars have already been subtracted. A traditional IRA is valued at the pre-tax level for estate tax purposes.

Most employer sponsored retirement plans tend to be pre-tax dollars and are similar, in that respect, to a traditional IRA, so if additional retirement savings are made beyond an employer sponsored plan a Roth IRA can provide tax risk diversification.

Unlike distributions from a regular IRA, qualified Roth distributions do not affect the calculation of taxable social security benefits.

Call 213-465-4835 and they can go over all the info on the advantages and disadvantages of a ROTH IRA