Ask Mary Beth: Money Q & A |
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Roth less beneficial to older taxpayers
I am retired. Can I contribute to the new Roth IRA? Can I take
out any amount of money at any time? What tax rate will I use
when rolling over existing IRAs, and will it be the same all four
years?
Mary Beth answers:
First of all, as with traditional IRAs, you must have income from
a job to contribute to a Roth IRA. One of the advantages of the
new Roth IRA which will become available next year is that you can
continue contributing to it beyond age 70 1/2 as long as you're
working. Also, there is no mandatory distribution age for a Roth IRA as there is for a traditional IRA.
If you choose to roll over funds from your traditional IRA to a
Roth IRA next year, you will have to pay income taxes at your
regular rate on the entire rollover, but the taxes can be spread
out over four years. This applies to 1998 rollovers only.
I generally do not recommend that older people with substantial IRA
accounts exercise this option because they could end up with a
whopping tax bill--even if it is spread out over four years.
For example, if you have $100,000 in your IRA and you roll it
over into a Roth IRA next year, you will have to pay income taxes
on the full amount over four years. Essentially that means
increasing your adjusted gross income by $25,000 a year for each
of the next four years. If you are receiving Social Security
benefits, that could subject some of your retirement benefits to
income taxes as well by boosting your income and subjecting up to
85 percent of your Social Security benefits to income taxes.
And all for what? The new Roth IRA will allow you to withdraw
funds tax free as long as you have held them in your account at
least five years and you are at least 59 1/2. In this case you
would have already paid taxes on your IRA. I don't see any
advantage for you. The Roth IRA will work much better for younger workers
whose retirement savings will be able to grow for many years tax
free and then can be withdrawn tax free.
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