Roth IRAs
A Roth IRA offers an alternative to a traditional IRA. You make contributions to a Roth IRA with your after-tax dollars, but don't pay federal income taxes on your future earnings as long as certain qualifications are met.
How They Work
You may be able to contribute up to $5,000 per year to a Roth IRA as long as you have earned income. The amount you're allowed to contribute is subject to limitations determined by your Modified Adjusted Gross Income (MAGI) and tax filing status. Beginning at age 50, you may contribute an additional $1,000 per year. Although you are making after-tax contributions, Roth IRAs offer tax-deferred growth potential, and qualifying withdrawals aren't subject to tax or penalty.
How They Can Be Used
There is no requirement that the money be used for education expenses. However, the 10% early distribution penalty on earnings is waived1 if the money is used to cover qualified education expenses for yourself, a spouse, your child, or your grandchild. These include tuition, fees, books, supplies, and equipment required for enrollment at an accredited college or university, as well as room and board if the student attends half-time or more. They do not include repayment of student loans.
Benefits
- Tax Savings – Roth IRA contributions are not tax-deductible. However, earnings over the years are tax-deferred and potentially tax-free. You can also withdraw contributions prior to age 59½ without taxes or penalties if you meet certain exception rules.
- Flexibility – Based on your personal savings goals, you can invest your assets in a variety of products including mutual funds, annuities, CDs and more. Additionally, you are not required to begin taking distributions from your Roth IRA at age 70½.
- Consolidation – You have the option of converting assets from your qualified retirement plan, such as a 401(k), or traditional IRAs into a Roth IRA. However, note that any non-taxed portion of the amount you convert is considered taxable income and that there are several factors to consider before determining if a Roth conversion is appropriate for you.
Considerations
- Taxation – While the 10% early distribution penalty does not apply to withdrawals that are used for qualified education expenses, you will be required to pay taxes on them.
- Financial aid eligibility – Although the money in a traditional IRA is not counted as an asset when calculating financial aid, withdrawals do count as parental income, potentially reducing financial aid eligibility.
- Effect on retirement – Unplanned withdrawals may reduce retirement funds; parents should use an IRA for college only if retirement is covered by other sources.
Contact a Thrivent Financial representative to see if a Roth IRA is right for you.
1 In addition to education expenses, the 10% early distribution penalty may also be waived for other qualified expenses. Visit www.irs.gov for more information.
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