Saving for retirement

The Roth IRA

Saving for your retirement is now easier – and more rewarding. To help you make the most of your retirement plan, Raymond James offers the Roth IRA, a retirement account in which the entire amount can ultimately be distributed tax-free.

Through listening to you and working toward pre-established goals, our financial advisors can assist you in allocating your hard-earned money effectively so it continues to grow after your working years. Some of the key provisions of the Roth IRA are covered below.

Contributing to a Roth IRA

An individual may contribute up to $4,000 a year to a Roth IRA (less any contribution made to a traditional IRA for that year). This non-deductible contribution is available to single individuals with earned income and an Adjusted Gross Income – also referred to as AGI* – of less than $95,000 or married individuals filing a joint return with an AGI of less than $150,000. For single filers, the allowed contribution is phased out for AGI between $95,000 and $110,000. For married individuals, the allowed contribution is phased out for AGI between $150,000 and $160,000. No contribution is allowed if an individual is married and files separately, unless AGI is under $10,000.

* Your income from salary, interest, dividends or capital gains minus certain items such as contributions to a 401(k) plan or deductible IRAs.

Increased Contribution Limits

Due to recent legislation, IRA contribution limits have been gradually increasing.

Catch-up Provisions

People who reach age 50 before the end of the taxable year may contribute an additional $500 from 2003 to 2005 and an additional $1,000 thereafter.

Rollover or Conversion of an Existing IRA

Distributions from a traditional IRA may be rolled over or converted to a Roth IRA if an individual’s AGI (same for married or single) is not more that $100,000 in the year of the rollover or conversion.

The distribution amount is treated as ordinary income, but is not included as income for purposes of determining a $100,000 AGI limit.

In addition, a distribution from a traditional IRA being rolled over or converted into a Roth IRA is not subject to the 10% premature withdrawal penalty tax imposed on withdrawals from traditional IRAs before age 59 1/2.

A Tremendous Retirement Savings Option

Four Key Reasons to Consider a Roth IRA

• All distributions from the account can be tax-free. Although contributions to a Roth IRA are not tax-deductible, earnings grow free of taxes. When you reach age 59 1/2, if the Roth IRA has been in place for at least five years, any withdrawal is tax-free. Avoiding the tax bite on your withdrawals means more income in retirement. This may be particularly attractive to individuals unable to deduct IRA contributions, due to their participation in an employer’s plan.
• No required minimum distributions. The tax deferral can be extended beyond the age 70 1/2 threshold of a traditional IRA.
• Contributions can be made after age 70 1/2. You can continue contributing to a Roth IRA as long as you have earned income. People are living and working longer today – the average 70-year-old man will live another 10 years, the average 70-year-old woman, 14 years.
• Withdrawals may be made penalty-free for a first-time home purchase. As with a traditional IRA, you can withdraw funds from your Roth IRA (up to a lifetime maximum of $10,000) to make a down payment on a first-time home purchase. A first-time homebuyer is defined as someone who has not owned a home for two years prior to the purchase of the new home.

The Raymond James Self-Directed Roth IRA Advantage

Flexibility

The Raymond James Self-Directed Roth IRA allows many different investment alternatives, including common and preferred stocks, corporate bonds, government securities, open- and closed-end mutual funds, variable annuities, CDs and REITs. The Self-Directed IRA provides the flexibility and diversification necessary to respond to changes in both the financial markets and in your financial needs and objectives.

Consolidated Recordkeeping

To keep up with IRA rules, you must maintain accurate and detailed records. Raymond James, as custodian, receives the contributions, provides detailed records of transactions, prepares statements reflecting all assets, makes distributions based on your instructions and handles tax reporting. You receive a consolidated statement reflecting all account activity during the year.

Simplicity

If you maintain IRAs at more than one institution, it may be difficult and time consuming to gather information for tax preparation each year. If you are currently receiving monthly or quarterly statements for all your IRAs, you may be constantly overwhelmed with paper. Combining your assets in one IRA has distinct advantages. Transferring IRAs held elsewhere to a Raymond James Self-Directed IRA can be done quickly and easily. Most securities can be transferred to Raymond James without having to sell them.

A Cost-Effective Choice

You may be able to reduce the custodial fees you are paying. At Raymond James you can maintain your IRA for one reasonable annual fee. In fact, IRAs with a value of $250,000 or more pay no annual fee. A Raymond James Self-Directed IRA can offer you professional service from your personal financial advisor, substantial investment flexibility and access to our nationally recognized securities research capabilities.

Traditional IRA vs. Roth IRA

Assuming $4,000 annual contributions and 8% annual return

Contributions to the traditional IRA are assumed tax deductible with the tax savings reinvested at an 6% after-tax rate of return. The participant is taxed at a 25% rate upon distribution of all IRA assets after the end of the period. This is a hypothetical example and is not intended to represent the performance of any specific investment or portfolio.

Rolling Over or Converting a Traditional IRA to a Roth IRA

Who should consider this strategy?

The answer depends on your financial situation. A number of factors should be considered with the help of your tax advisor, including:

• Can you pay the taxes due on the distribution from sources other than your IRA?
• Will you fit under the $100,000 AGI ceiling? Individuals or couples may convert their IRAs to Roth IRAs if their AGI is less than $100,000.
• To what extent is your traditional IRA funded with nondeductible contributions?
• What is your tax bracket? What is your age? If you are being taxed at a lower rate and have many years to grow the Roth IRA, the implications of tapping your account to pay the tax bill will be offset by years of tax-free earnings and ultimately, tax-free withdrawals.
• Are you approaching the mandatory distribution age of 70 1/2? A partial rollover could potentially reduce future tax bills.

Consider this example:

Carl and Lisa, both 42, are evaluating the pros and cons of the Roth IRA from the standpoint of net spendable income in retirement and/or net proceeds to their heirs. Lisa has $100,000 in a rollover IRA from her former employer’s retirement plan and they are considering converting to a Roth IRA.

Two factors will make the Roth IRA an attractive alternative. If Carl and Lisa assume: 1) their current tax rate (25%) will be the same in their retirement years; and, 2) they will pay the tax due ($25,000) on the distribution from the traditional IRA with funds from sources outside the IRA.

Carl and Lisa plan to retire at age 62. The comparison calculation projects a retirement cash flow of $55,000 annually for 20 years and assumes an annual return of 9.5% on IRA investments. The result is that the funds in the traditional IRA are depleted when Carl and Lisa reach 80, while the Roth IRA would, even after adding in the projected value of the tax savings during the accumulation phase, show a net value of over $480,000, assuming an estate tax rate of 41%.

This is a hypothetical example and is not intended to represent the performance of any specific investment or portfolio.