I am eligible for a retirement plan with my employer and was wondering if I can also contribute to a Roth IRA. Also, is the Roth better than a traditional IRA?
The Roth IRA was made available to taxpayers effective with the tax year 1998. There are many differences between the Roth and traditional IRA but the major differences are:
- The Roth IRA is not deductible from taxable income on your personal income tax return as with a traditional IRA.
- When you make distributions from a traditional IRA, 100% of the distribution is subject to income taxes. Qualified distributions from a Roth IRA are tax free.
- If you are eligible to participate in your employers retirement plan, you are possibly limited based on your adjusted gross income, to the amount you can contribute to a traditional IRA.
For instance, a couple filing jointly is unable to make contributions to a traditional IRA if their 2005 AGI exceeds $75,000. With the Roth IRA, the eligibility to participate in your employers plan is of no significance. There are AGI phase outs for the Roth IRA but they are much higher than the traditional IRA. For example, a couple filing jointly can make the maximum contribution unless their 2005 AGI exceeds $150,000.
TAX TRAP: it is important to note that if you withdraw funds from a Roth IRA before five years, from the year of contribution, there will be a penalty assessed.
Is the Roth better than a traditional IRA? It might be. Each has its good and bad points. Each taxpayer must first become familiar with each of these points then determine which best suits their needs.
It is very important to remember that what I have outlined above is only the major points of the Roth IRA program. There are many other issues that must be considered. Before you make a decision about making contributions to any retirement plan, it is advisable for you to discuss the issue with a tax professional.
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