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Michigan Credit Union League Home » CU Community » SAS Credit Unions » Marketing » Newsletter Help » Financial Health  

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Lori Bahnmueller
Michigan Credit Union Leauge - Your Money Matters

SOUTHFIELD, Mich., November, 1998 — Tax free income? While it sounds too good to be true, the Roth individual retirement account (IRA), which became available in 1998, will be a blessing to many American's retirement savings.

People of all ages can benefit from a Roth IRA and add a powerful boost to their retirement nest eggs, reports Everybody's Money.

"It is a tremendous opportunity," says Dave Weinbach, PlanAmerica representative at State Capitol Credit Union in Madison, Wisconsin. "It has the potential to be the best source of tax-free income during retirement. It's a tremendous retirement income supplement."

Rules of the Roth
Unlike a traditional IRA, Roth IRA contributions never are tax-deductible. Instead, you pay taxes on your money before you put it into your Roth IRA. But you may avoid owing income taxes on the funds at withdrawal. With a traditional IRA, often you don't pay taxes on your money when you make your contribution, but you do pay when you take a distribution.

If you can't deduct traditional IRA contributions, you always will benefit from making Roth contributions instead. The ability to withdraw both contributions and earnings tax-free in retirement always will result in more money to spend than making the same nondeductible contribution to a traditional IRA.

Even if you can deduct traditional IRA contributions, you usually benefit from making Roth contributions instead. A $2,000 Roth contribution usually will result in more money to spend in retirement than making a $2,000 traditional IRA contribution that you can deduct. This is true as long as your highest income tax bracket during retirement is the same or higher than it is now.

The Roth IRA also allows you to withdraw funds tax-free before retirement under certain conditions. If your funds have been in your account for at least five years you can withdraw tax-free once you reach age 59 1/2, or buy a first-time home, or if you become disabled. Your benefactors are also to withdraw funds tax-free in the event of your death.

While the maximum contribution is $2,000 per person, the same as a traditional IRA, the tax-free compounding growth is extremely powerful, Weinbach indicates.

Who is Eligible?
Joint filer's modified adjusted gross income can be up to $160,000 and single filers modified adjusted gross income can be up to $110,000. Even if you participate in a retirement plan at work, you still may contribute to a Roth IRA. And, it doesn't matter what age you are — as long as you have earned income you can continue to contribute.

Generation Xers
If you're just starting out, the Roth IRA might be for you. You're focused on your future, which may include a career, a family, and a house to call home. As others will tell you, the older you get the faster time flies. Retirement is not something to think about later. A Roth IRA may be the perfect place to start.

The younger you are, the more opportunity you have to take advantage of compounding, tax-free growth of your funds. By saving now, you'll need to put away less later.

With your busy lifestyle, you might have put off retirement planning. Perhaps you took advantage of available tax deductions on contributions in the `80s and stopped when the rules changed. Either way, you're probably eligible for a Roth IRA, and it might be just what you need to maximize growth of your IRA funds.

Ahh, retirement. The light at the end of the tunnel is finally visible and you have plans. Maybe they include a little bungalow on a sunny beach or a passport to destinations afar. Your children may also have plans to make you a grandparent. Whatever your future holds, the Roth IRA probably can help you make the most of your nest egg.

To Convert or Not to Convert
If you decide to convert your traditional IRA to a Roth IRA, your conversion contribution is considered income and is subject to income tax in the year in which you make your conversion.

However, if you convert your IRA before Jan. 1, 1999, you'll have the option to spread the income equally over a four-year period, and spread the tax burden as well. Contact your tax adviser to see if a conversion would be beneficial to you.

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