2012 Roth IRA Review and Contribution Limits

The old or traditional Individual Retirement Accounts or IRAs came on the investment scene with the enactment of the Employee Retirement Security Act (ERISA) in 1974. These individual retirement plans provided a reduction in taxable income, the IRS doesn’t tax the growth on the monies while they are accumulating, however upon withdrawal, all amounts disbursed are taxed at income tax rates.

Roth IRAs came on the scene as a result of the Tax Payer Relief Act of 1997, and like traditional IRAs, Roth’s accumulate without tax on their gain, interest or dividends that investments held in the account might have. However unlike traditional tax-deductible IRAs, Roth IRAs are not tax-deductible and money withdrawn from Roth IRAs after the age of 591/2 are not taxed, (a┬álater article will discuss early withdrawal penalties as well as exception to the rules).

2012 Roth IRA Contribution Limits

  • $5,000
  • Additional $1,000 if over age 50
  • IRA Roth Contribution amount is limited based upon income, from IRS.gov

Roth IRAs have been attractive to both those in low and high tax brackets planning for retirement; on one hand those in very low brackets realize very little tax savings if they invested in a regular tax-deductible IRA, and would appreciate a large tax-free accumulation until retirement, and tax-free income when they retire. Those in very high tax brackets, might indeed save a few thousand dollars on their tax returns if they invested in a tax-deductible IRA, yet if they were investing say for 20 or 30 years or longer, because they are now young, when they reach retirement the total tax savings they might have enjoy could pale in comparison to a large hundreds of thousand dollar or million dollar account, and would prefer tax-free access a Roth IRA would afford. Of course it is always good to talk to a tax advisor first before making a financial decision like this.

 

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