Roth IRA vs. Roth Contributory IRA

by Patricia Stallworth

A Roth IRA -- individual retirement account -- allows you to set aside after-tax money for retirement with a big plus: tax-free income in retirement, and differs from a Roth contributory IRA in its method of funding. Both plans are funded with personal contributions, while Roth IRAs may also get income by converting other retirement plans.

Roth IRAs

Roth IRAs provide participants with a number of benefits. Aside from the big plus of tax-free income in retirement if you follow the rules, the funds you invest grow tax-deferred. For a Roth IRA, you must be at least 59 1/2 and have your account open for at least five years before you start to withdraw funds. Also, there is no requirement to ever take the money out of your Roth IRA. However, if you should need it before age 59 1/2, since you're making contributions with after-tax money, you can take out your contributions -- but not the earnings -- tax- and penalty-free.

Roth Contributory IRA Limits

Roth IRAs are an effective way to save for retirement, but they have some restrictions. For example, the maximum amount you can contribute in 2013 is $5,500 -- $6,500 if you are 50 or older -- and there is an income limit for participation. The income limit for singles to make the maximum contribution is $112,000 -- $178,000 for couples filing jointly.

Converting to a Roth IRA

Converting to a Roth is easier than ever. However, be prepared to pay the taxes on the money you are converting at your current tax rate. You can transfer some or all of your existing balance from a traditional IRA to a Roth IRA as well as all or part of other retirement accounts, such as an employer-sponsored 401k or 403b plan if the plan allows. In most cases, you must leave your job before you can convert an employer-sponsored plan, but there are exceptions. Check with your plan administrator for procedures and any restrictions.

Roth IRA Conversion Considerations

Tax-free income in retirement is a big plus, but before you rush to convert all your traditional IRAs and retirement plans to Roth IRAs, consider some relevant factors. Converting may make sense only if you earn too much to contribute to a Roth IRA now and expect your tax rate to be higher in retirement. Investing enough money in a non-retirement account to pay the taxes is an essential preparation for conversion. Taking money from a retirement account to pay taxes could result in penalties on top of the taxes. Finally, converting to a Roth IRA may push you into a higher tax bracket or have other consequences that will cost you more money. If you aren’t sure, check your tax tables or consult a financial professional to understand the impact on your specific situation before you make a decision.

About the Author

Based in Atlanta, Patricia Stallworth has been writing finance-related articles since 1999. She is the author of several books including "Minding Your Money," which was featured in the Wealth Building series in “Black Enterprise” magazine. She has a MBA in finance and a BS in education.

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