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Posted by Bill on April 14, 2007, 12:07 am
Please log in for more thread options >> I've been thinking about the value of a
>> traditional vs. Roth IRA for my sons, who are
>> just starting out. In the process I came to the
>> conclusion that one is not automatically
>> necessarily better than the other, even for
>> young people. In fact, given two simple
>> assumptions, both types of IRAs give
>> EXACTLY the same results upon retirement.
>> [Elided for brevity]
> Actually, the situation still favors the traditional
> IRA, but only by a small amount.
>
> The reason for this is that withdrawals from a
> Roth IRA are not completely tax-free, they are
> tax-free up to the amount(s) contributed, and
> thereafter are included in income.
>
> [Again, elided for brevity]
Ooops!
_All_ _Qualified Distributions_ from a Roth IRA are
tax-free, under current law.
I realize that while there is a certainty about the very
existence of *death and taxes* ... there can be no equal
certainty that the Congress will not (in its infinite
"wisdom") change tax laws in the future, and retract the
tax-free distinction currently available under the Roth IRA
rules ... however, there is no doubt that you have
mis-stated the current law.
I believe you were thinking of distributions taken either
during the first five years after establishment of a Roth
IRA, or before the age of 59 1/2 -- since both of these
actions would limit the "tax-free" withdrawal to the amount
of original contributions.
But Pub 590 leaves no doubt that if the distribution is
_Qualified_ -- that is, taken after age 59 1/2 and more than
five years after inception for the Roth IRA in question --
then said distribution is "qualified" and is not subject to
tax or penalty.
[See Figure 2-1, under the heading "Are Distributions
Taxable" in the section on Roth IRAs.]
Bill
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