If you want to save for retirement and avoid taxable income during your retirement years, a Roth IRA may be the best choice for you. With a Roth IRA, you make after-tax contributions and have the potential for income tax-free withdrawals. This product can be especially beneficial for you if you expect to be in a higher tax bracket when you retire.
If you expect to be in a lower tax bracket when you retire, you may benefit more from a Traditional IRA
Advantages
Tax-free withdrawals
If you meet certain requirements, you can withdraw funds from your Roth IRA without paying any additional income taxes. This is what separates the Roth IRA from other IRAs. You must meet two qualifications to receive income tax-free withdrawals from a Roth IRA:
-
Your Roth IRA has been established for at least five tax-year periods beginning with the first tax-year for which a contribution was made to a Roth IRA.
-
You have experienced one of the following:
- Qualified as a first-time homebuyer ($10,000 lifetime limit)
- Attained the age of 59½
- Become disabled
- Died
Tax-deferred growth
Even though your contributions to a Roth IRA are made with after-tax dollars, those contributions and earnings grow tax-deferred and compound more rapidly than they would in a taxable account.
No annual fees
Modern Woodmen does not charge an annual fee for Roth IRA administration.
Additional information
Contributions
For those under age 50 during the tax year for which the contribution is made, the maximum contribution allowed is the lesser of your earned income or:
$5,000 for tax years 2009 and 2010
For those age 50 and older, the maximum contribution is the lesser of your earned income or:
$6,000 for tax years 2009 and 2010
The deadline for making a contribution for the previous tax year is your tax-filing deadline (usually April 15th).
Participation
Your ability to contribute to a Roth IRA is determined by both your tax-filing status and your modified adjusted gross income (AGI).
For tax year 2009
If you are married and file taxes jointly:
| Modified Adjusted Gross Income |
Allowed Contribution |
| Less than $166,000 |
Full contribution |
| Between $166,000 and $176,000 |
Partial contribution |
| $176,000 or more |
No contribution |
If you file as single or head of household:
| Modified Adjusted Gross Income |
Allowed Contribution |
| Less than $105,000 |
Full contribution |
| Between $105,000 and $120,000 |
Partial contribution |
| $120,000 or more |
No contribution |
For tax year 2010
If you are married and file taxes jointly:
| Modified Adjusted Gross Income |
Allowed Contribution |
| Less than $167,000 |
Full contribution |
| Between $167,000 and $177,000 |
Partial contribution |
| $177,000 or more |
No contribution |
If you file as single or head of household:
| Modified Adjusted Gross Income |
Allowed Contribution |
| Less than $105,000 |
Full contribution |
| Between $105,000 and $120,000 |
Partial contribution |
| $120,000 or more |
No contribution |
Unlike a Traditional IRA, contributions to a Roth IRA may be made after the age of 70½, as long as you or your spouse have earned income for the tax year in which you choose to make a contribution.
Withdrawals
Withdrawals are income tax-free if you have had a Roth IRA for five tax-years or more and you attain the age of 59½, become disabled, die or qualify as a first-time homeowner. You do not have to take mandatory distributions from a Roth IRA at age 70½, as you do with other IRAs.
At the time of withdrawal, contributions are considered withdrawn before earnings, and contributions are not taxable when withdrawn. Withdrawals of earnings that do not qualify for an income tax-free withdrawal will be subject to ordinary income tax. A 10 percent premature distribution penalty may apply if you are less than 59½ years old.
Transfer existing Roth IRAs to Modern Woodmen
If you have an existing Roth IRA that you’d like to move to Modern Woodmen, you can avoid additional income taxes by completing a Roth IRA to Roth IRA transfer.
Should you convert a Traditional IRA to a Roth IRA?
When you convert a Traditional IRA to a Roth IRA, you pay taxes now in exchange for the potential for income tax-free withdrawals during retirement. If you have funds available to pay the income taxes due on conversion, you may be better off converting to a Roth IRA, but you should consult your Modern Woodmen representative and your tax adviser about your individual circumstances.
If you would have to withdraw money from your Traditional IRA to pay the taxes due to a conversion or if you believe you will need funds from your Traditional IRA in the next five years, a conversion to a Roth IRA may not be right for you.