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Roth IRAs
Unlike a Traditional IRA, contributions to a Roth IRA are not tax-deductible. However, a Roth IRA provides other key advantages, including tax-deferred growth of your investment earnings, the potential for tax-free withdrawals, and easier access to the money you contributed for retirement.
Consider a Roth IRA over a Traditional IRA if...
- You expect your current tax bracket to remain the same or increase when you retire.
- You believe tax rates will rise in the future.
- You don't qualify for deductible contributions to a Traditional IRA.
- You are using your IRA as an estate planning tool. (A Roth IRA doesn't require minimum distributions during your lifetime, and your heirs can inherit the assets income-tax-free.)
Investor profile:
- You can open a Roth IRA if you have earned income.
Annual contribution limit (2009):
- Up to $5,000
($6,000 if you are age 50 or older)
or 100% of total compensation or earned income (if self-employed), whichever is less.
- Contributions are allowed after age 70 ½ as long as you have earned income.
Deductibility:
- All contributions are nondeductible.
Withdrawals:
You can withdraw contributions from a Roth IRA at any time, tax- and penalty-free. Investment earnings may be withdrawn tax- and penalty-free provided that you have held the Roth IRA for at least five taxable years and one of the following occurs:
- You reach age 59 1/2.
- You become disabled or die.
- The money is used to purchase a first home for yourself, your spouse, children, grandchildren, parents, grandparents, or your spouse's grandparents, subject to a $10,000 lifetime limit per individual and
the money must be withdrawn no more than 120 days after making the purchase.
If investment earnings are withdrawn during the first five years and no exception applies, your distribution will be subject to current income taxes and a 10% early withdrawal penalty.
Can you contribute to a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified adjusted grosss income is less than:
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$176,000 for married filing jointly or qualifying widow(er),
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$120,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
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$10,000 for married filing separately and you lived with your spouse at any time during the year.
- Modified adjusted
gross income is determined before reduction for any deductible contributions
to an IRA.
You must be at least age 18 and have earned income to open a Traditional
or Roth IRA at The Commerce Funds.
The Roth IRA advantage
Traditional IRAs offer an important advantage over taxable accounts: the ability to let your investment earnings and any deductible contributions grow tax-deferred until they are withdrawn. Roth IRAs may provide even greater after-tax retirement savings, especially if your tax bracket in retirement is the same or higher than your current one. The reason? Investment earnings in a Roth IRA not only grow tax-free, they can be withdrawn completely free from federal income taxes, assuming you are at least age 59 1/2 and you hold your account for five or more years.
IRS Circular 230 disclosure: Commerce Bank does not provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, and was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of Commerce Bank should obtain their own independent tax advice based on their particular circumstances.
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