The 1997 Budget Deal - What It Means to Taxpayers

Policy Backgrounders | Taxes

No. 144
Wednesday, February 04, 1998
by Bruce Bartlett

The Roth IRA

The tax bill also created a new type of individual retirement account, the Roth IRA, named for the Senate Finance Committee chairman, who promoted the idea. The Roth IRA differs from a conventional IRA in that contributions are made with aftertax dollars but distributions, including earnings, are tax-free.

"The Roth IRA allows aftertax contributions and tax-free withdrawals."

Contributions are limited to $2,000 yearly, but eligibility to contribute is phased out for single taxpayers with adjusted gross incomes between $95,000 and $110,000 and for joint filers with adjusted gross incomes between $150,000 and $160,000. The law also allows a holder of a conventional IRA to pay taxes on it and convert it to a Roth IRA.

Both a taxpayer and spouse can contribute to Roth IRAs if their income is at least equal to the contributions. People can contribute to Roth IRAs even if they participate in a pension plan or contribute to conventional IRAs.

Proponents of Roth IRAs have long contended that the additional economic growth stimulated by funds from Roth IRA investments will generate new tax revenue that will more than offset any loss in taxes from making withdrawals tax-free.38

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