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Types of IRAs  |   Roth IRA

A Roth IRA is similar to a Traditional IRA in that you can invest up to $5,000 for 2009 and enjoy tax-deferred growth on your earnings. But there are some important differences. First, contributions are not tax-deductible, but can be withdrawn anytime without paying taxes. Second, earnings withdrawn in retirement or after five years are tax-free if you meet one of the following criteria:

  • You attain age 59½
  • Become disabled;
  • The distribution is made for a first-time home purchase (up to $10,000);
  • The distribution is made to a beneficiary after your death.
If you are 50 years of age or older, you may have the additional benefit of catch-up contributions, which allows you to invest an extra $1,000 per year.

You can contribute the full $5,000 if you're single and your AGI does not exceed $105,000 or if you're married filing jointly and your AGI does not exceed $166,000. Your eligibility to contribute phases out if you're single with an AGI between $105,000 and $120,000, or if you're married filing jointly with an AGI between $166,000 and $176,000.

Who should open a Roth IRA? The ideal person for a Roth IRA is someone who thinks he/she might be in a higher tax bracket during retirement, may not need the money and wants to leave it to heirs, may want to withdraw original contributions before retirement, or is age 70½ or older and wants to keep putting money into an IRA.

Converting to a Roth IRA
If you currently have retirement dollars invested in a Traditional IRA but want the benefits of a Roth IRA — including potential tax-free access to your money in the future — you can convert some or all of your Traditional IRA savings to a Roth IRA if your AGI for the year is less than $100,000 (a married taxpayer filing separately cannot convert a Traditional IRA to a Roth IRA).

To make a conversion, you have to close out your Traditional IRA and roll over the balance to a Roth IRA. This is considered a taxable event, so you will have to pay income taxes on your IRA money. If you use part of your IRA money to pay this income tax, you will have to pay an additional 10% penalty tax on that amount.

If you decide to withdraw money from your Roth IRA within five years after the conversion, your money will be subject to a 10% penalty tax.


Next: Simplified Employee Pension IRA (SEP-IRA)


Call 1-800-DREYFUS, or contact us to learn more about how a Roth IRA can help you build your retirement savings.

This does not constitute tax advice. Consult your tax advisor. There are fees, expenses, taxes and penalties associated with IRAs.

Investors should consider the investment objectives, risks, charges, and expenses of a fund carefully before investing. Download a prospectus that contains this and other information about a fund, and read it carefully before investing.
   
   
 

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