By: The American Academy of Estate Planning Attorneys

Since Congress introduced the Roth IRA in 1997, certain retirement account owners have been able to choose between two kinds of accounts with very different features. Whether a Roth is the right option for you depends on a number of factors, including your income and your savings goals.

Traditional IRA
A traditional IRA is a tax-deferred account. Contributions to the account are made with pre-tax dollars, meaning that you get a tax deduction for money you put into your account, and you normally don’t pay income tax on your IRA funds until you start withdrawing those funds during retirement. Because you are not taxed on traditional IRA contributions, federal law requires that you begin taking a minimum annual distributions from your account shortly after you reach age 70 1/2. The exact amount of these annual distributions is determined by your life expectancy. You pay a penalty if you do not withdraw at least the minimum in any given year.

Roth IRA
A Roth IRA, by contrast, is a tax-free account. You do not get a tax deduction for Roth contributions in the year you make them. However, provided you follow certain rules, you can withdraw the principal and earnings on the account tax-free when you reach retirement age. Further, unlike a traditional IRA, a Roth carries no requirement that you take annual distributions beginning at age 70 1/2. This provides the potential for account funds to grow tax-free throughout your lifetime and makes a Roth IRA an appealing estate planning tool for many individuals.

Contribution Caps
Contribution limits for traditional and Roth IRA’s are the same. In 2011, those under age 50 may contribute up to $5,000 in earned income to an IRA. If you reach your 50th birthday before the end of 2011, you are eligible to make “catch up” contributions, bringing your total IRA contribution limit to $6,000.

Income Limits
Not everyone is eligible to contribute to a Roth IRA. If you are married filing jointly, your 2011 income must be below $169,000 in order for you to make a full contribution. The amount you may contribute is phased out as your income increases from $169,000 to $179,000. If your income is $179,000 or higher, you are ineligible to contribute to a Roth IRA. The phase out range for individual filers in 2011 is $105,000 to $120,000.

Conversion
Regardless of your income, you have the option to convert a traditional IRA to a Roth IRA. When you convert, you pay income tax on all the funds in your traditional account, including both principal and earnings. However, after those funds are converted into Roth funds, they are never again subject to income tax.

If you won’t need to rely on your IRA for retirement income, a Roth conversion could be a smart estate planning choice. For example, if you’re 70 years old and have $300,000 in a traditional IRA, converting to a Roth would eliminate the need for you to take any future distributions from your account. So, if you earn 8 percent on the funds in your account and live to age 86, you’ll pass on well over $1 million to your heirs through your Roth IRA. Your beneficiary will take minimum required distributions based on their life expectancy. However, since it’s a Roth IRA, all the distributions to them will be income tax-free.

Roth 401(k)
With the popularity of Roth IRA’s, Congress expanded the concept to 401(k) plans. A Roth 401(k) is a hybrid of a traditional 401(k) and a Roth IRA, and it is only available if your employer offers you the option.

Like a traditional 401(k), a Roth 401(k) carries no income restrictions, and the usual 401(k) contribution limits apply. For 2011, you may contribute up to $16,500 if you are under age 50, and you may contribute up to $22,000 if you are age 50 or older. These limits apply to contributions made to both kinds of 401(k) plans; you cannot use a Roth 401(k) to double your 401(k) savings.

Like a Roth IRA, the funds contributed to a Roth 401(k) are not tax deductible; however, withdrawals are tax-free.

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