Roth IRAs. Contributions to a Roth IRA are made out of after tax income but withdrawals from the fund are not taxed. In effect, the Roth IRA reverses the tax process. With the Traditional IRA, contributions are not taxed but withdrawals are taxed. Under a Roth IRA, contributions are taxed but withdrawals are not taxed. The similarity between the Roth and Traditional IRA is that you do not pay taxes while the money is in either of these IRAs. The minimum age for a Roth withdrawal is the same as a Traditional IRA — 59½. However, with a Roth there is no maximum age when withdrawals must begin. A disadvantage of the Roth IRA is that the account must be in existence for five years before withdrawals can begin. The contribution limits are the same for a Roth IRA as a Traditional. In 2022, the limit is $6,000 per person under age 50 and $7,000 if over 50. However, your ability to contribute to a Roth IRA is based on your MAGI, therefore not everyone is eligible. To be eligible to contribute the maximum amount in 2022, your modified adjusted gross income must be less than $129,000 if single or $204,000 if married and filing jointly. Contributions begin to be phased out above those amounts, and you cannot put any money into a Roth IRA once your income reaches $144,000 if a single filer or $214,000 if married and filing jointly. Some taxpayers may consider converting their Traditional IRA to a Roth IRA because of the relative flexibility the Roth program offers (higher income limits and the absence of maximum age restrictions). However, a Roth conversion involves many considerations including the potential payment of taxes on the converted amount, future income needs and the impact of the conversion on the taxability of social security benefits. In short, conversion should only be made with the advice of a qualified financial planner. 10–13. EDUCATION SAVINGS. There are two main programs that allow individuals to accumulate tax-advantaged savings for educational purposes — 529 Plans and Coverdell Education Savings Accounts. 529 Plans (also known as Qualified Tuition Programs) are education savings plans operated by a state or educational institution designed to help families save for college. Your contributions are not tax deductible, however your investment grows tax-deferred, and distributions to pay for the beneficiary’s college costs come out federally tax-free. Plans vary by state and you may invest in any state’s 529 plan so it is worth doing some research. Some states offer certain tax breaks to invest in your home state’s plan so be sure to
penalty for early withdrawal. While individuals don’t face the 10% penalty associated with taking money from their account before the age of 59½, the funds are subject to normal income taxation. The withdrawal of funds must begin by the age of 72 (70½ if you turned 70½ prior to January 2020). IRAs are personal savings programs which allow individuals to accumulate funds with tax-free growth or on a tax- deferred basis until they retire. Contributions are used to buy investment property such as stocks or bonds which must be held by a qualified IRA trustee or custodian. There are two types of IRA programs — Traditional IRAs and Roth IRAs. Traditional IRAs. Contributions to a Traditional IRA are made with pre-tax money and any earnings can potentially grow tax-deferred until you withdraw them in retirement. For 2022 the annual contribution limit is $6,000 per person or $12,000 for married couples. In addition, tax payers who are age 50 and over are allowed to make an additional “catch–up” contribution of $1,000. Consequently, married taxpayers who are over age 50 may contribute up to $14,000. There is no longer an age limit to making IRA contributions (previously age 70½). Although everyone can contribute the maximum amount to a Traditional IRA, the amount you are able to deduct for tax purposes varies. If you (and your spouse, if married) are not covered by an employer’s retirement plan, a tax deduction may be claimed for the full amount of the contribution. If you are covered by an employer retirement plan, a full deduction can be claimed only if your Modified Adjusted Gross Income (MAGI) is below a certain level. In 2022, these limits are $68,000 for single individuals and $109,000 for married couples filing jointly. If your MAGI is above these levels, the deductibility of your IRA contribution is gradually phased out and is eliminated at income levels above $78,000 for single individuals and $129,000 for married couples who file jointly. The rules governing IRA withdrawals are fairly strict. Generally, a person may not begin withdrawals before the age of 59½. The withdrawal of funds before that age is called a premature distribution and is subject to regular income tax plus a 10% tax penalty. However, the penalty provision does not apply if the withdrawal is made to pay for qualified medical or college expenses or to help with the purchase of your first home. Additionally, under the Traditional IRA, the withdrawal of funds must begin by the age of 72 (70½ if you turned 70½ prior to January 2020).
CHAPTER 10: SAVINGS & INVESTMENTS
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