By taking advantage of the Roth IRA provisions of the Taxpayer Relief Act of 1997, you can save taxes in 1997 and enjoy tax free withdrawls from your IRA in the future!
You can still make a $2000 contribution to an ordinary IRA at any time up to the earlier of filing your taxes or April 15, 1998 and take the deduction on your 1997 taxes. This means that a taxpayer in the 28% tax bracket could save $560 on 1997 taxes.
Next, you can convert your IRA to a new “Roth IRA.” This is a new type of IRA established by Congress which allows for non-deductible contributions from earnings but has the benefit of tax free withdrawls. The tax law allows an existing IRA to be converted to a Roth IRA. This process requires that the taxpayer pay tax on all converted amounts which have not yet been subject to income tax.
However, to ease the tax burden of conversion, the IRS will allow taxpayers to spread out the payment of those taxes over four years! Thus, for someone converting a $2000 IRA contribution made on a 1997 tax return, that taxpayer will have to pay tax on an additional $500 for four years.
Once converted, Roth IRA funds are no longer subject to income taxation! Distributions from Roth IRAs are tax free. No tax will ever be paid – NEVER.
Here are the results of a single taxpayer contributing 2000 per year for 50 years: *(assuming 12% rate of return on assets)
After Roth IRA Value Traditional IRA Value Roth Benefit
10 Years 33,035 28,302 $ 4733
20 Years 130,904 116,206 $14,698
45 Years 2,440,428 2,190,553 $249,875
50 Years 4,311,115 3,870,749 $440,366
A married couple making maximum contribution can save an additional $880,732 by taking advantage of the Roth IRA. Other benefits of the Roth:
No required beginning date
May be withdrawn early if owner becomes disabled
Contributions may still be made after reaching age 70½
First time home buyers may withdraw up to $10,000 for a home
It still may not be too late to get a jump on lowering your taxes savings and saving for your retirement!