BOSTON (CBS) – Roth IRAs have been around since 1997. Congress was looking for ways to help people save more for retirement but at the same time get some of its tax dollars upfront. Roth IRAs have some interesting features that the traditional IRA does not.

With a Roth, you use after-tax dollars to make your contribution but when you withdraw the funds in retirement, you will not owe income tax on the withdrawals including the money the Roth has earned. You must have earned income to contribute to a Roth IRA, and if you’re working, you can continue to contribute past age 70½.

There are some other rules. Withdrawals from the account will be free of income taxes if the owner has held the Roth IRA for at least five years and has attained the age of 59½. With a Roth IRA you are always permitted to get at your contributions without a penalty because you have already paid taxes on them.

The minimum distribution rules do not apply to the Roth IRA and funds can stay in the account past the owner reaching age 70½.

As with all good things, there are limitations. Contributions are phased out for single taxpayers if your adjusted gross income (AGI) is between $112,000 and $127,000 and for married couples filing jointly with an AGI between $178,000 and goes away at $188,000.

A Roth IRA can be a good choice for retirement savings. The younger you are, the sweeter the deal. A 25-year-old may not be able to use the deduction for a retirement plan contribution but tax-free income 40 years from now in retirement will be a bonus.

You can also convert a regular IRA to a Roth IRA. The proceeds of your IRA will be taxable in the year you make the conversion and there will not be a 10% penalty due if you are under age 59½.

One more thing:  A conversion works best if you do not need to take money out of the IRA to pay the taxes that will be due.

You can choose to convert only part of your IRA as well. This feature will allow you to convert only the amount you can afford the taxes on each year. Check out the various calculators online to see if it is worth making the conversion.

Beware that the extra income that a Roth conversion generates may bump you into a higher tax bracket and the consequences could be taxable Social Security benefits, higher Medicare premiums and higher estimated taxes.

Because there is no mandatory withdrawal age with a Roth IRA they make a great wealth transfer tool. You can name a grandkid your beneficiary and upon your death they can begin withdrawals based on their life expectancy. It is really the gift that keeps on giving for the account may earn more than is required to be withdrawn thus extending it for many years.


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