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The Roth IRA. What is it and how does it work Roth IRA vs. Traditional IRA Contributing to a Roth IRA Conversion from Traditional IRA Types of distributions Is the Roth IRA right for you?. - PowerPoint PPT Presentation
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The Roth IRA
What is it and how does it work
Roth IRA vs. Traditional IRA
Contributing to a Roth IRA
Conversion from Traditional IRA
Types of distributions
Is the Roth IRA right for you?
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This material is intended to provide general information and is not intended to provide legal or tax advice. Because individual situations vary, each situation should be examined carefully to determine appropriate planning strategies. It is recommended that decisions be made after consultation with competent financial, tax and legal professionals.
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The Roth IRA
The Roth IRA is a retirement savings vehicle similar to the Traditional IRA. With a Traditional IRA you may get tax benefits when you put the money in. With a Roth IRA you may be able to take money out completely income-tax-free.
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The Roth IRA
What the Roth IRA is and how it works
In the simplest terms, with a Roth IRA you put away currently-taxed income to be withdrawn income-tax-free during retirement.1
51 Assumes funds meet Roth IRA minimum holding requirements, if applicable. Retirement funds withdrawn from a Roth
IRA before age 591/2 may be subject to income and/or penalty taxes, depending on the purpose of the withdrawal.
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No
$3,000
Yes
Yes
5-year holding period may apply to withdrawals
Tax-deductible contribution
Maximum contribution2
Income-tax-deferred growth
Income-tax-free withdrawals
Minimum holding period
The Roth IRADifferences between the Roth IRA and the Traditional IRA
Maybe1
$3,000
Yes
No3
None
Traditional IRARoth IRA
1 Deductibility of Traditional IRA contributions are based on adjusted gross income and participation in an employer-sponsored retirement plan.
2 For 2003-2004 contributions cannot exceed the lesser of $3,000 or your taxable compensation. Spousal contributions are based on total household income, allowing couples to make a maximum contribution of up to $6,000. If you are 50 years of age or older, the limit is $3,500.
3 Withdrawals of non-deductible contribution amounts are tax-free.
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The Roth IRA
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Roth IRATraditional IRARoth IRA
Maximum contribution age
Required minimum distributions begin
Tax penalty for earlywithdrawals
Withdrawals for retirement
None
No required distributions for the
original owner
Varies depending on the type and purpose
of the withdrawals
Withdrawals are income-tax-free if the
account is held for more than five years
701/2
701/2
Varies depending on the type and purpose
of the withdrawals
Withdrawals are taxed at present rate1
1 Withdrawals of non-deductible contribution amounts are income-tax-free.
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Roth IRA
The Roth IRA
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Traditional IRA
Withdrawals for first-time homebuyers ($10,000 lifetime maximum) before age 591/2
Withdrawals for higher education before age 591/2
Yes – income tax owed on amounts
exceeding contributions if
withdrawn within the first five years
Yes – income taxes owed on amounts
exceeding contributions if
withdrawn within the first five years
Yes – withdrawals taxed at present rate
Yes – withdrawals taxed at present rate
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The Roth IRA
Roth IRA vs. Traditional IRA
Compare the difference between making a $3,000 contribution to a Roth IRA for 20 years and making a $3,000 contribution to a nondeductible Traditional IRA for 20 years.
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Roth IRA vs. Traditional IRA1 Traditional IRA
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$23,833
Roth IRA
$60,000
0
$148,269 $124,436
The Roth IRA
$60,000Amount contributed
Value in 20 years $148,269 $148,269
Taxes owed on lump-sum withdrawal
Total amount available to withdraw
1 This hypothetical example is not indicative of any particular investment and does not consider the tax deductibility of the Traditional IRA, which may be important for some investors. The example assumes all contributions are after-tax dollars. Investment return is assumed to be 8 percent, and the assumed federal income tax bracket is 27 percent.
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The Roth IRA
Roth IRA vs. Traditional IRA
If the funds are withdrawn over a period of 20 years, how much would you be able to spend at the end of each year?1
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$15,102Roth IRA:
Traditional IRA: $11,024
1 Withdrawals may be subject to income and/or penalty taxes. This hypothetical example is not indicative of any particular investment. Investment return is assumed to be 8 percent, and the assumed federal income-tax bracket is 27 percent both before and during retirement.
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Putting money into the Roth IRA
You have two options for putting money into a Roth IRA:
Contribute new money to a Roth IRA each year.
Convert an existing Traditional IRA to a Roth IRA.
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Putting money into the Roth IRA
Contributing new money to a Roth IRA
You can open a Roth IRA as long as you have earned income and your adjusted gross income is below a specified limit.
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Putting money into the Roth IRA
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Full contribution
Contribution of less than $3,000
No contribution allowed
Income under $95,000
Income between $95,000-$110,000
Income over $110,000
Income under $150,000
Income between $150,000-$160,000
Income over $160,000
Income of zero (0)
Income between 0-$10,000
Income over $10,000
Single Married filing a joint return
Married filing separately
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Converting a Traditional IRA to a Roth IRA
If you convert a Traditional IRA to a Roth IRA, you trade current income taxes for the potential of income-tax-free withdrawals in retirement.
You can’t convert a retirement plan distribution directly into a Roth IRA.
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Converting a Traditional IRA to a Roth IRA
You must meet the following qualifications in order to convert funds:
Your modified adjusted gross income (AGI) must be under $100,000, whether you are single or married filing a joint return. If you are married and file separate returns, you do not qualify for a conversion. The converted amount is not included in determining your AGI for this purpose.
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Converting a Traditional IRA to a Roth IRA
You must meet the following qualifications in order to convert funds:
You must pay the income tax on the conversion in the year of the conversion.
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IRA balance $100,000
Tax owed1 $27,000
Total remaining $73,000
10 percent early withdrawal penalty
Total converted
IRA balance $100,000
Tax paid out of other funds
Total remaining $100,000
No early withdrawal penalty
Total converted
Taxes paid out of IRA Funds Taxes paid out of other funds
Converting a Traditional IRA to a Roth IRA
Paying taxes on a conversion
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$2,700
$70,300 $100,000
1 Assumes a 27 percent federal income tax bracket.
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Converting a Traditional IRA to a Roth IRA
Partial conversions
Consider a partial conversion if:
A full conversion would push you into a higher income tax bracket.
You don’t have enough cash available to pay the tax on a full conversion.
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Converting a Traditional IRA to a Roth IRA
Five-year holding period
Withdrawals of earnings on the account and withdrawal of any funds converted from a Traditional IRA may be subject to penalty and income taxes; if a withdrawal is made within the first five years of the first contribution or conversion to the Roth IRA.
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Converting a Traditional IRA to a Roth IRA
Five-year holding period
If you have multiple Roth IRAs, the clock begins with the first Roth IRA you open. When the first Roth IRA meets the five-year holding requirement, all your Roth IRA accounts meet the requirement.
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Converting a Traditional IRA to a Roth IRA
Required minimum distributions
You are not required to take minimum distributions from a Roth IRA.
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Types of distributions
The Roth IRA is a retirement savings account, but you might find that you need the money in your account for other purposes. Just remember that if you withdraw funds from your Roth IRA for purposes other than retirement, you will have less savings for retirement.
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Types of distributions
Three types of distributions can be made from your Roth IRA:
Qualified distributions. Taxable distributions with no penalty. Taxable distributions with a penalty.
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Types of distributions
Qualified distributions
After satisfying the five-year holding period, the following distributions can be made with no federal income tax or penalty owed.
Payments to you after age 591/2. Payments to a beneficiary after your
death.
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Types of distributions
Qualified distributions
Distributions due to your disability. First-time home purchase, up to the
lifetime limit of $10,000 for you, your spouse, your children, your grandchildren, and your parents or other ancestors.
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Types of distributions
Distributions with no penalty
After satisfying the five-year holding period, the following withdrawals can be made with no penalty owed, prior to age 591/2. Federal income tax is owed on any amount that exceeds the amount of annual contributions.
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Types of distributions
Distributions with no penalty
Contributions, excluding earnings, can be withdrawn tax-free at any time.
Higher education expenses for you, your spouse, your children, or your grandchildren.
Certain medical expenses. A series of substantially equal payments over
your life (or life expectancy).
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Types of distributions
Distributions with penalty
Any other distributions can be made at any time and are subject to federal income tax and penalties on the amounts exceeding the amount of contributions made directly to the Roth IRA.
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Types of distributions
Taking out funds from a Roth IRA
If you have multiple Roth IRAs, no matter which account you take money out of, the money will be distributed in a set order:
1. Annual contributions (non-conversion).2. Previously taxed portion of your first conversion
Roth IRA.3. Not previously taxed portion of your first
conversion Roth IRA.
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Types of distributions
4. The rest of your conversion IRAs, in order, with the previously taxed portion distributed first.
5. Any earnings on your accounts.
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Roth IRA case study 2: Bob and Brenda
$30,000deductible
Remaining Traditional IRA balance
$60,000
$30,000 nondeductible
$20,000deductible
Roth IRA $40,000
$20,000 nondeductible
$50,000nondeductible
$50,000deductible
Traditional IRA$100,000
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The Roth IRA
These IRA choices raise a few questions:
Does it make sense for me to continue contributing to a Traditional IRA?
Should I put my money into a Roth IRA instead?
Should I leave my money in a Traditional IRA?
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Questions?
1. Enrollment Process: 10 Minutes
2. Payroll Deducted: Up to $3000max/yr
3. 50 yrs or Older: Additional $500/yr
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Thank you for attending
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