The Advantages of Making After Tax Contributions to an IRA

by Jane Meggitt

Pretax contributions are made to traditional Individual Retirement Accounts (IRA). If the account holder is not covered by an employer's retirement plan, contributions to these accounts may be deductible on federal income taxes up to a certain limit. After-tax contributions are made to Roth IRAs. While contributions to the Roth IRA are not tax-deductible, there are several advantages to making after-tax contributions.

Roth Contributions

Both the traditional and Roth IRAs have the same contribution limits. As of the time of publication, it is $5,000 for individuals under the age of 50 and $6,000 for those 50 and up, assuming they earn at least that much in income. Those filing singly may contribute the full amount to a Roth IRA if the adjusted gross income is under $107,000. If the AGI is between $107,000 and $122,000, single filers may partially contribute, but are ineligible for a Roth IRA if the AGI is greater than $122,000. For married couples filing jointly, those with an AGI of less than $169,000 may contribute the full amount. If the AGI is between $169,000 and under $179,000 a partial contribution is permitted, but those with AGIs above $179,000 are ineligible.

Withdrawals

One advantage of the Roth IRA over the traditional IRA is the Internal Revenue Service rules on withdrawals. While contributors to either type of IRA must be at least 59 1/2 years old to begin making withdrawals free of penalties, those holding traditional IRAs must take mandatory withdrawals by the age of 70 1/2. Owners of Roth IRAs have no mandatory age requirement, and never have to withdraw from the account at all if so desired.

Taxes

Traditional IRAs, funded with pretax dollars, are subject to tax upon withdrawal. Presumably, the retiree is in a lower tax bracket, but that may not always be the case. Roth IRAs, funded with after-tax dollars, are not subject to taxes upon withdrawal after age 59 1/2.

Estate Planning

Roth IRAs may be used for estate planning purposes. Because the Roth IRAs do not require withdrawals, the earnings may grow and increase for intended beneficiaries. If the spouse inherits the Roth IRA, the IRS permits him to treat it as his own account. Roth IRAs do not have to go through the probate process after the owner's death. Proceeds go to the named beneficiary on the account. When the account holder dies, the beneficiary must supply a certified copy of the death certificate and his own identification to receive funds in the account.

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