ROTH IRAs

2

PLEASE DO NOW…

In your notebooks, please answer the following

questions:

1.What are the advantages of a traditional IRA?

2.Is it better to be taxed on IRA distributions or

is it better to be taxed on your IRA

contributions? Please explain.

3

TODAY’s GOALS

• What is a Roth IRA?

• Who is eligible to establish a Roth IRA?

• How can we contribute to a Roth IRA?

• Distributions from a Roth IRA.

4

INVESTMENT MANAGEMENT STANDARD(S)

Achievement Standard: Evaluate savings and investment options to meet short and long-term goals.

Achievement Standard: Evaluate services provided by financial deposit institutions to transfer funds.

5

DEFINITIONS to KNOW

ROTH IRA

6

WHAT IS A ROTH IRA?

A retirement account where contributions are NEVER tax-deductible (they are taxed!!!) and earnings grow on a tax-free basis.

An excellent supplement to an individual’s retirement income.

In general, assets in the Roth IRA are NOT taxed when they are withdrawn.

ROTH IRA Video

7

WHO IS ELIGIBLE TO ESTABLISH A ROTH IRA?

Any individual, regardless of age, who has taxable compensation for the year.

Any individual, regardless of age, who has self-employment income for the year.

To make a contribution, the individual must have a modified adjusted gross income (MAGI) that is less than a certain amount.

8

HOW CAN WE CONTRIBUTE TO A ROTH IRA?

1)Make a contribution to your Roth IRA account.

2)Make a contribution to your spouse’s Roth IRA account.

3)Transfers.

4)Rollover contributions.

9

DISTRIBUTIONS FROM A ROTH IRA

In general, distributions from a Roth IRA must NOT occur before age 59½.

In general, distributions that occur before 59½ will be charged a 10% early distribution penalty.

Qualified distributions from a Roth IRA are ALWAYS tax-free.

Non-qualified distributions from a Roth IRA may be taxed.

There are some exceptions to the 10% penalty rule.

A Roth IRA owner does NOT have to take required minimum distributions (RMDs) the year he or she reaches age 70½.

10

WHAT IS THE DIFFERENCE BETWEEN A TRADITIONAL AND ROTH IRA???

Traditional IRA: taxes are paid on the back end, or when you take distributions. Your original investment, plus all earnings are taxed! Roth IRA: taxes are paid on the front end, or when you make contributions. Your original investment is taxed, your earnings are not taxed!

11

WHAT IS THE DIFFERENCE BETWEEN A TRADITIONAL AND ROTH IRA???

Video: Roth IRA vs. Traditional IRA

12

LET’s PRACTICE…

Jack, age 61, takes a $6,000 distribution from his Roth IRA. His income tax bracket is 35%. How much will he be taxed on the distribution?

Solution:

Taxes on Roth IRA QUALIFIED Distributions =

$0.00

13

A LOOK AHEAD…

Understanding the P/E Ratio

14

QUESTIONS???