Your Retirement - Part 3 - FAQ

The Roth IRA

As if the rules described above were not complicated enough, as part of the Taxpayer Relief Act of 1997 Congress created two new planning vehicles: the Roth IRA, named after Senator William V. Roth (R-Del.) And the Education IRA. The Roth IRA, in effect, turns a traditional IRA on its head. While traditional IRAs permit the taxpayer to shelter pre-tax earnings but taxes them upon withdrawal, the Roth IRA is for after-tax savings, but both the original deposits and the earnings on them are not taxed on withdrawal. In addition, unlike traditional IRAs, Roth IRAs are available to taxpayers already contributing to a plan at work and to taxpayers who continue to work after age 70 ½. Finally, there is no minimum distribution requirement upon reaching that age.

Eligibility for the Roth IRA is limited to taxpayers with an adjusted gross income of under $110,000 if single and $160,000 if married (to be adjusted for inflation after 1998). The contribution is limited to $2,000 a year, with smaller limits for taxpayers with income of between $95,000 and $110,000 if single and between $150,000 and $160,000 if married and filing a joint return.

Financial experts calculate that for many Americans a Roth IRA will save more money than a traditional IRA. This is because the future value of the interest earned, which will never be taxed, often far outweighs the value of deferring taxes on the investment itself. Remember, traditional IRAs may be converted to Roth IRAs this year only! Consult with your financial advisor to help decide if a Roth IRA makes sense for you.

The Education IRA

Similar to the Roth IRA, the new education IRA permits individuals to save up to $500 annually with the earnings accumulating tax free. This may be of special interest to parents and grandparents who can contribute this amount annually to accounts owned by their children and grandchildren. Although $500 a year isn't a lot of money given the size of college tuition, over time it can make a difference. It is only available to taxpayers whose adjusted gross income is under $110,000 for single taxpayers and $160,000 for married taxpayers filing a joint return, with limits on contributions for taxpayers with income between $95,000 and $110,000 and between $150,000 and $160,000, respectively (all numbers to be adjusted for inflation after 1998). If the parents' income exceeds these levels, grandparents and others with lower taxable incomes can contribute to the accounts. But only $500 can be added per child per year.


Funds can only be added to the accounts while the child is under age 18 and must be withdrawn by the time he or she reaches age 30 or turned over into an account for another family member. An advantage with these accounts over most accounts created for children is that the funds do not have to be turned over to the child at age 18. But a word of caution: if you expect that your child or grandchild will apply for financial assistance for college, it may be wiser to invest the money in your own name. The financial aid application process for college has become increasingly complex, but, in general, colleges treat assets held by the family -- especially a grandparent -- differently from assets held by the student.

Only a portion of family assets are expected to be used for a specific student's education, while all of the child's assets are expected to be used before the student draws on financial aid.


Conclusion


While the rules regarding retirement plans are complicated (and the summary above only brushes the surface) the most important lesson is to always name a designated beneficiary and to make sure that you name individuals only. (You can also name a trust that meets certain requirements beyond the scope of this article.) The second lesson is to consult with a qualified professional advisor when you reach 70 ½, if not before.

Cohen & Oalican, LLP provide a full spectrum of services for the elderly, for disabled adults, and for the families.