IRAs:Traditional vs. Roth

November 29, 2007

Michael Ruff

Danielle Nick

Outline

Intro Eligibility Income Limits Contribution Limits Tax Treatments Withdrawal Guidelines Required Distributions Rollover Conclusion

IRA Background

Established 1975 as part of Employment Retirement Income Act of 1974. Originally restricted to non-pension employees 1982 participation extended to all workers Structured around tax deductions (i.e. Traditional

IRA) Has made few changes since (i.e. Traditional IRA)

IRA Background Continued

Roth IRA established 1998 Chief Sponsor: Senator William V. Roth Jr. Tax contributions not tax deductible Has tax-free growth

Eligibility

Traditional Virtually all inclusive

for those with earned income■ No income Restrictions■ Age Limit for

contributions 70.5 years

Roth More restrictive

■ No age restriction■ Income Restriction

2007:

Contribution Limit

Single Tax Payer

Married Tax Payer

Full Contribution

0 - 95,000 0 - 149,999

Partial Contribution

95,000 - 109,999

150,000 – 159,999

No Contribution

110,000 - Above

160,000 – Above

Contribution limit

Roth and Traditional IRAs’ max contributions are identical. Limited to the lesser of:

100% of MAGI or $4,000

Catch up provision: Must be above 50 Limited to $1000

Contribution deductibility for Traditional IRAs Participants involved in employer-sponsored

retirement plans have limited deductibility Deductibility depends on MAGI and marital filing status If you (and your spouse) are not covered, you get the full

deduction. Otherwise:

Single TaxpayerMarried Filed Jointly

You are coveredYou aren’t covered but

your spouse is

Fully Deductible0- $52,000 0 - $83,000 0 - $156,000

Partially Deductible$52,000-$59,999 $83,000-$84,999 $156,000-$159,999

Not Deductible$62,000 and over $85,000 and over $166,000 and over

Tax Treatments

Traditional Tax deduction Pre-tax income

contributed Earnings grow tax-

deferred

Roth No tax deduction After-tax income

contribution Earnings grow tax-

free

Tax Treatments

Professor Sinow made $90,000 in 2007 He has 2 choices:

Roth $4000 contribution His taxable income

for 2007 is $90,000 Upon withdrawal, no

taxes due

Traditional $4000 contribution His taxable income

for 2007 is $86,000 Upon withdrawal,

taxes due on principal and earnings

Withdrawal Guidelines:Similarities Both share these similarities:

Minimum age: 59.5 Withdrawal before 59.5 = 10% tax penalty

Penalty is in addition to any taxes owed upon regular withdrawal

Certain exceptions for early withdrawals First time home-buyer Qualified education expenses Hardship expenses

Withdrawal Guidelines:Exceptions If first-time homebuyer,

No 10% penalty for early withdrawal $10,000 for individuals $20,000 for married couples

Must use funds within 120 days Qualified expenses include:

Buying, building, re-building costs Settlement, financing, and closing costs

Withdrawal Guidelines:Exceptions If you have qualified higher education costs,

No penalty for early withdrawal No $ limitations Qualified expenses:

Used by individual, his/her spouse, child, or grandchild Used at IRS-approved college, university, vocational, or

post-secondary facility Used for tuition, fees, books, or supplies

If enrolled at least half time, room and board, too

Withdrawal Guidelines:Exceptions If you have qualified hardship expenses,

No penalty for early withdrawal Qualified expenses:

Un-reimbursed medical expenses “prolonged and expensive costs” must exceed 7.5% of Adj. Gross Income (AGI)

Medical insurance premiums Must be unemployed for 12 months

Withdrawal Guidelines:Special Roth Treatment One catch for Roth IRAs Must have held the account for at least 5

years If so: not subject to taxes If not: must pay taxes on the withdrawn

accumulated earnings Still no 10% penalty

Applies to the early withdrawal exceptions already mentioned

Required DistributionDifferences

Traditional Required Distributions start at

age 70.5 Can delay 1st payment until

April 1 of the next year But, essentially make 2

distributions in one year IRS provides minimum

distribution tables based on: Age Expected distribution period

Roth NONE! If you want, you don’t

ever have to make distributions

Because gov’t doesn’t collect taxes on distributions, it doesn’t care when you take the money out

Minimum Required Distribution Table for Traditional IRA

Required minimum IRA distributions

To calculate the year's minimum distribution amount, take the age of the retiree and find the corresponding distribution period (in years). Then divide the value of the IRA by the distribution period to find the required minimum distribution.

Age of retiree

Distribution period

 

Age of retiree

Distribution period

 

Age of retiree

Distribution period

70 27.4 86 14.1 102 5.5

71 26.5 87 13.4 103 5.2

72 25.6 88 12.7 104 4.9

73 24.7 89 12 105 4.5

74 23.8 90 11.4 106 4.2

75 22.9 91 10.8 107 3.9

76 22 92 10.2 108 3.7

77 21.2 93 9.6 109 3.4

78 20.3 94 9.1 110 3.1

79 19.5 95 8.6 111 2.9

80 18.7 96 8.1 112 2.6

81 17.9 97 7.6 113 2.4

82 17.1 98 7.1 114 2.1

83 16.3 99 6.7 115 or older 1.9

84 15.5 100 6.3    

85 14.8 101 5.9    

Source: Bankrate.com

Minimum Required Distribution for Traditional IRAExample:

Professor Sinow turns 70.5 on Jan. 1, 2008 He has $100,000 in a Traditional IRA

He has a MRD: In the amount of $3,650 For the 2008 tax year

OR He has a MRD:

In the amount of $3,650 between 1/1/09 & 4/1/09 In the amount of $3,636 Both withdrawals are part of the 2009 tax year

Minimum Required Distribution for Traditional IRA If investor does not take the MRD…penalty Penalty equal to 50% of the difference

between MRD and actual distribution Example:

Professor Sinow’s MRD is equal to $5,000 for the year

If he only takes a $2,000 distribution He has a penalty of $1,500 taken from IRA’s subsequent

balance.

RolloverTraditional into Roth Traditional IRA holders can convert to Roth Single & married taxpayers:

Must have AGI of less than $100,000 to qualify for the rollover AGI limit is for conversion year Conversion years are not related

Pay taxes on the principal and interest rolled over into the Roth account

Rollover amount is unlimited

ConclusionWhich is better? It depends!

Age (how long account will grow) Tax rates

Rate when you contribute Rate when you withdraw

Positives and negatives with both

Determine which is best for you?http://www.finance.cch.com/sohoApplets/RothvsRegular.asp

Questions?