Taxing proposal

Roth IRA's tax advantages are worth looking into

To invest in an IRA or Roth IRA, that is the question. There are advantages to both kinds of individual retirement accounts, but a Roth IRA may be the smarter move.

“If you are a young professional and have maximized the amount you can put into a 401(k), without question it makes more sense to do a Roth IRA,” says Cheryl Creuzot, president and COO of the Associates in Financial Planning Group in Houston. A Roth IRA will allow you to save money for retirement, accumulate it tax-free and withdraw it tax-free at retirement.

Born out of the Taxpayer Relief Act of 1997, based on legislation written by Sen. William Roth (R-Delaware), the Roth IRA is considered a better tax shelter for retirement savings than its siblings. It allows contributions of up to $2,000 annually, even if you already participate in an employer-sponsored program.

To be eligible, you or your spouse must have compensation or alimony equal to the contribution. Also, in order to make the full $2,000 contribution, your modified adjusted gross income (AGI) can’t exceed $95,000 for single individuals and $150,000 for married couples filing jointly. After that, the amount you can contribute is gradually reduced, then eliminated, once the AGI exceeds $110,000 (single) and $160,000 (married).

You can withdraw contributions tax-free at any time, but generally earnings have to stay in until you’re 591/2 and at least five years have expired. Otherwise, they are taxable and subject to a 10% early-distribution penalty.

For more information, see “Last-Minute Tax Savers,” this issue, or read The Roth IRA Made Simple by Gary R. Trock (Conquest Publishing Inc., $14.95).