Explaining the Roth IRA
By Tim Frye
Our goal at Pronto Education is to keep our fellow preparers sharp, and assist them in explaining certain aspects of tax and making them simple to understand for their present and future clients. This is no easy task, and especially with all of the changes in the tax code taking place currently. There are changes sure to come in the future, and keeping your client well informed and up to date has never been more important. Advising clients on the moves they can make in the future to escape heavy taxation is one of the main traits of a superb preparer. This is where you will earn your clients trust and turn them into returning customers. Retirement is an area of financial planning that is very important to most taxpayers, and it is your job to assist them in saving money on taxes so that their funds will be sufficient enough to live on once they call it quits. This article will assist you as a preparer in explaining the benefits of a Roth IRA.
What is the Roth IRA?
The acronym IRA stands for Individual Retirement Arrangement. There are two main types of IRAs, the Traditional and the Roth. They are the diametric opposite of each other. The Traditional IRA has the taxpayer making contributions that are tax-deductible, meaning at the end of the year the individual will receive an Adjustment to income and have these contributions excluded from taxation. The Roth IRA has contributions that are not tax deductible, and the funds are to be included in taxable income. However, upon point of qualifying distribution the funds along with their growth are tax free.
What are the Benefits of a Roth IRA?
The Roth IRA can be a powerful and virile investment vehicle for those taxpayers who are young and upwardly mobile. The general premise is your client will pay the tax on these contributions right away while their marginal brackets are lower, and then when they pull it out after the allowable distribution age of 59 ½, they will escape taxation at the higher future marginal rate. Here are some of the benefits of the Roth IRA.
-Withdrawals from a Roth are tax-free under qualifying circumstances
-There are no Required Minimum Distributions, or RMDs
-Bequethels to heirs can be tax free both estate and federal
Downside to the Roth
As with anything in life, there are cons to the Roth. Here they are:
-Early distributions can be subject to the same harsh taxes and penalties as a Traditional account
-There are income ceilings placed on the ability to contribute
-Losses are tax-deductible only upon the cashing out of all like-kind Roth accounts
Roth Contributions Limits
The income limitations placed on contributions are probably the biggest weakness of the Roth IRA. Hey, nobody’s perfect, there are still plenty of quality reasons to encourage your clients to create an account. First off, there is the earned income limit. The taxpayer is permitted to contribute up to the lessor of earned income for the year, or the designated contribution ceiling. The secondary limit is placed on your higher earning clients. Roth Contributions are fleshed out gradually above these income levels for 2012.
-Single/Head of Household: $110,000-125,000
-Married Filing Joint: $173,000-183,000
-Married Filing Separately: $0-10,000
Remember to note that the number used to judge these ceilings for phase outs is Modified Adjusted Gross Income.
The Roth IRA can be a great choice for the up and coming crowd who are planning on making great money later on in life. Taxes are at historically low rates overall, so it would be wise for those qualifying taxpayers to pay tax on their retirement contributions now while the rates are low. When they undoubtedly shoot sky high in the future, your clients retirement won’t be exposed.