ROTH vs IRA

[Guest bikermama]

My husband is 53. Shooting for retirement at age 63. Tax bracket will probably be unchanged in retirement. He puts 6K per year in a SEP IRA. He has an additional 2,000 this year (tax year 2007) to put SOMEWHERE. He could just put it in the SEP, but does it make sense to have combination of IRA types? He doesn't currently have a ROTH. The calculator I used projected a little better income in retirement with a ROTH, but I think I read that a ROTH contribution needs a minimum of 5 years before withdrawal or face a penalty. Does that mean if he contributes to a ROTH when he is 61, that money can't be touched until he is 66? What about contributions made IN retirement?

Thanks!

[masteff]

The 5-years is counted from the beginning of the year in which you first set up and contribute to a Roth IRA. You don't restart the 5-years every time a contribution is made.

It's different if it's a conversion contribution (where you take a regular IRA and convert it into a Roth), there the 5-years restarts for each converted amount.

[GMK]

And contributions can be made to a Roth in retirement (there is no age limit on Roth contributions)

IF you have earned income and your adjusted gross income is below the limit for your filing status.

Contribution amounts are limited by earned income (up to the annual maximum contribution limit). For example, if your husband's earned income in 2009 is $1,300, then the most he can contribute for 2009 is $1,300.

[John G]

Contributions to a Roth can always be withdrawn, at any time, for any purpose.

Some reasons to consider a Roth:

<> The Roth could be in your name. His earned income can enable you to have a Roth.

<> No set timetable or mandatory amounts that must be withdrawn.

<> Roth may be put into a custodial account with different investment options. (probably not the case for you, but could be a factor for someone with narrow choices of investments in their primary retirement account)

Warning: Yes, you can contribute to a Roth in retirement, but for most people, retirement means the end of earned income. Interest, dividends, capital gains, etc. are not "earned income". Without earned income you can not make contributions to your Roth. However, if you or your husband has any kind of income in retirement (eg. part time job)... then Roth on.

Caution: If you expect to be in the same tax brackets now and in retirement, then Roth vs IRA vs SEP IRA should be nearly a wash. Some calculators are too simplistic to cover the subtle differences of taxation. Some factors that might tilt you one way or the other: your expectations of future tax law changes, state income tax status now and where you may retire, change in IRA/Roth laws, etc. You will find it extremely difficult to accurately predict how all of these will play out over 10 years, but ultimately you make some assumptions and make a choice.

[Guest bikermama]

Thank you for your responses.

I did a little more reading after your comments about withdrawals and beneficiaries. It sounds like it makes sense to start a ROTH, just to have options down the road.

This excerpt I found won't be news to you IRA pros, but others may learn something new.....

ROTH not Subject to Minimum Distribution Rules

Unlike a traditional IRA, a Roth IRA is not subject to the minimum distribution rules. This means that you will not be required to remove any of your Roth IRA funds in the year in which you turn age 70 1/2. This being the case, a Roth IRA will allow you to continue to build up the value of the IRA free from all income taxes for the benefit of your heirs. And while estate taxes may have to be paid on the value of the Roth IRA upon your death, no part of the Roth IRA will be subject to income tax to your beneficiaries. This is completely different from a traditional IRA. The value of a traditional IRA will be included in your estate. But the traditional IRA earnings will also be taxed as income to your beneficiaries. This could cause a very large combined estate/income tax to be assessed against your traditional IRA. A Roth IRA can eliminate much of this tax burden because Roth earnings are not subject to income tax, either to you or to your heirs. This could be an enormous estate tax issue for many of you, and something that you should understand and implement into your estate tax planning.

Spouse as Roth IRA Beneficiary

As with a traditional IRA, if your spouse is your Roth IRA beneficiary, and you happen to go to the great beyond, your spouse can treat your Roth IRA as her own. She can keep the Roth IRA intact. She will not have to "accelerate" or even take income should you pass on. Your spouse will also not have to deal with any required distribution rules, and will have all of the normal rights and privileges that would accrue to any Roth IRA account. Short and sweet.

[John G]

There is another potential benefit associated with beneficiary designations - stemming from the two tiered structure.

Example: Each spouse names the other as the primary beneficiary on their IRA and Roths. They name other heris as secondary beneficiaries. When the first spouse dies, the surviving spouse can elect to receive the assets of the account and continuing the IRA or Roth tax treatment as if it is there own. But, if they do not feel they need those assets, the can decline (completely or partially) to be a beneficiary and the assets will pass based upon the secondary designation. This reduces the surviving spouses estate. The secondary beneficiaries get the continuing benefit of the IRA or Roth as the funds are dispersed.

Like A/B trusts, the two step beneficiary designation may be a useful tool in estate management.