Tax Strategies: Roth IRAs

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Contributions to a Roth IRA are not tax-deductible, but distributions-including capital gains, interest, and dividends-are tax-free if certain conditions are satisfied. Total contributions to a Roth IRA and a traditional IRA cannot exceed $5,000 per individual for 2012. (The $5,000 amount is a combined limit for traditional and Roth IRA contributions.) This contribution limit is indexed for inflation after 2012. For 2012, single taxpayers with an AGI between $110,000 and $125,000, or married couples filing jointly with an AGI between $166,000 and $176,000, will have their ability to contribute to a Roth IRA phased out. For married taxpayers filing separately, eligibility for contributions to a Roth IRA completely phases out at AGI of $10,000. Contributions to a Roth IRA may continue to be made after age 70½, as long as the owner's compensation is equal to or greater than the amount contributed.

If you are 50 or older, you may make an additional "catch-up" contribution in addition to the limit discussed above. You may make this "catch-up" contribution of $1,000 in addition to the limit discussed above. You may make this "catch-up" contribution even if you contributed the maximum in previous years.

If ineligible to contribute to a Roth IRA, you can still contribute to a traditional IRA.

Distributions
Contributions (excluding rollovers) may be withdrawn federal income tax-free at any time. Distributions-including capital gains, interest, and dividends-are tax-free if you are at least age 59½ and the account has been established for longer than five tax years. Distributions before age 59½ are also tax-free if you have had a Roth account established for at least five tax years and are taken because of death, disability, or for the purchase of a qualified first home (up to a lifetime cap of $10,000). After contributions are withdrawn, rollovers may also be withdrawn penalty-free after five years following the rollover. Non-qualifying distributions exceeding the total contributions are subject to ordinary income tax and a 10% penalty on the earnings may apply if taken before age 59½. There is no mandatory distribution requirement during the owner's lifetime. Qualified Roth IRA distributions may be subject to state and local taxes, depending upon your state. You should consult your tax advisor for more information.