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THE ROTH IRA

April 10, 2008

The Roth IRA is a nice option for personal retirement planning. Contributions to a Roth IRA are not deductible, but earnings form them are permanently tax free at retirement. This contrasts with the traditional IRAs we discussed yesterday, which are tax-deductible (within strict limits) at contribution, but fully-taxable on withdrawal.

The choice between a Roth IRA and a traditional one involves a bet. If you forego the deduction, you are wagering that the benefits of having income permanently tax-free outweighs the value of a deduction today. That's most likely to be true if you expect to pay higher tax rates at retirement. This makes the Roth IRA especially attractive for younger workers, who are busy climbing up the tax brackets while they climb the career ladder. But given that the markets predict higher rates in just a few years, a Roth IRA might be a good bet for higher-income workers, too.

intrade 2011 tax rate prediction market at 7:45 am 4/10/08

The contribution limits for Roth IRAs are generally the same as traditional IRAs for 2007: $4,000 per taxpayer or $8,000 per couple, but limited to the amount of compensation income. The ability to fund a Roth IRA phases out for high-income taxpayers under the following schedule: