A foundation for financial goals

Taxes and Roth IRAs

Many people are more concerned about taxes and money around April of each year. One way to help money grow tax-free is to contribute to a Roth IRA. The Roth IRA is a unique retirement vehicle with many beneficial features.

The Roth IRA allows contributions on an after-tax basis. That means you already paid taxes on the money. The great news is that the account grows tax-free and withdrawals upon retirement are tax-free. Also, any contributions in a given year can be taken out tax- and penalty-free at any time. Your contributions can continue as long as you have earned income, and there are no mandatory withdrawals at age 70½ as there are with a 401(k) or a Traditional IRA. For 2006 and 2007 the maximum contribution is $4,000. You can add another $1,000 in each year if you are over age 50.

man and woman over 50 husband and wife sitting on their lawn

After your money has been invested for five years, there is no IRS penalty for distributions from your IRA if you are age 59½ or older, if you are a first-time homebuyer, if you want to pay for qualified higher education expenses, or if your medical expenses exceed 7.5 percent of Adjusted Gross Income.

Earnings are tax-free after five years if you are 59½ or older, if you are a first-time homebuyer, or upon death or disability.

The only limitations on the Roth IRA are that if you are a single tax filer, the ability to contribute phases out between $95,000 and $110,000 Adjusted Gross Income and joint tax filers have a phase-out range of $150,000 to $160,000 annually.