The Roth IRA. An IRA with a difference. Is it right for you?

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1 The Roth IRA An IRA with a difference Is it right for you?

2 The Roth IRA An IRA with a difference The original IRA was designed to help individuals plan for their retirement by enabling them to make tax-deductible contributions into an investment account which could also grow with taxes deferred. Subsequent changes in tax law modified the universal deductibility of IRA contributions. Other tax law changes have created a number of new IRA opportunities. One type, called the Roth IRA, has enjoyed growing popularity among investors and financial planning professionals alike for good reason. What is a Roth IRA? A Roth IRA allows you to make annual contributions with after-tax dollars. Because money you contribute has already been taxed, your principal will never be subject to taxes or withdrawal penalties as long as you stay within contribution guidelines. A Roth offers other important differences too: The Roth difference: Tax-deferred growth; tax-free withdrawals. Like the traditional IRA, earnings in a Roth grow with taxes deferred. However, unlike the traditional IRA, once certain conditions are met you may make withdrawals of both principal and earnings, tax-free. Withdrawals of earnings from your Roth IRA will not be taxed if: The money has remained in your Roth account for at least five years prior to withdrawal, and You are at least 59 1/2 years of age; You are buying your first home (subject to a lifetime maximum $10,000 withdrawal limit); In case of death or disability; You have certain major medical expenses. You can also make withdrawals from your Roth IRA for post-secondary school education expenses without incurring a 10% early withdrawal penalty. Income taxes on account earnings would be due on this type of distribution, however. A Roth has other important benefits that differ from traditional IRAs. For example: You can continue to contribute to your Roth IRA annually, even beyond the age of 70 1/2; You are not required to begin taking withdrawals at age 70 1/2. If you do establish a Roth IRA, you can still continue to contribute to a traditional IRA, as long as the annual contributions to both types don't exceed the maximum amount allowed.

3 Is a Roth IRA right for you? An important consideration to keep in mind is your future tax rate. If you think it will be the same or higher than your current rate, a Roth IRA is probably a good idea. You ll be gaining the advantage of tax-free growth for contributions on which you ve already paid taxes. And at retirement, you won t have to pay taxes on account earnings, either. However, if you think your tax rate will go down at retirement, and your income level qualifies, a traditional deductible IRA may be your best option. Why? Since you anticipate being in a lower tax bracket when you retire, a traditional IRA should give you the advantage of tax-deductible contributions now, along with tax-free growth until you begin taking distributions. At that point you ll pay taxes at a lower rate, which may save you money in the long run. As you can see, the guidance of your financial advisor or a qualified tax consultant is especially important when evaluating which type of IRA is best for you. Are you eligible? Individuals whose annual Adjusted Gross Income (AGI) is below $95,000 and couples filing jointly with AGIs below $150,000 are eligible to contribute to a Roth IRA. Contribution eligibility phaseouts occur at AGI levels between $95,000 and $110,000 for single tax filers, and from $150,000 to $160,000 for couples filing jointly. You can establish a Roth IRA as long as you (or your spouse) have earned income. It doesn't matter if you're already participating in an employer-sponsored retirement plan. You can make annual spousal contributions on behalf of a non-working spouse, plus your own. Consult with your financial advisor. A Roth IRA can make a difference in the future value of your retirement account primarily because of tax treatment. Whether it is best for you depends on the considerations outlined here and a number of others that reflect who you are and how you are planning for the future. This is why it is so important to consult with your financial advisor. If you decide that a Roth IRA is right for you, we hope that you will consider the Sentinel Funds. One of America s oldest fund groups, Sentinel has been helping investors reach their financial goals since We d like to help you reach yours.

4 Traditional IRA vs. Roth IRA Feature Roth IRA Traditional IRA Traditional IRA Deductible* Non-Deductible Eligibility (AGI) Individual: $95,000 with phaseout up to $110,000. Married filing jointly: $150,000 with phase out up to $160,000 Individual: $50,000 with phaseout up to $60,000 Married filing jointly: $70,000 with phaseout up to $80,000 Tax-deductible contributions? Depends on income and No participation in other No retirement plans Annual contribution limit $4,000 $4,000 $4,000 Catch-up contributions if age 50?** 2005 $ 500 $ 500 $ $1,000 $1,000 $1,000 Earnings grow tax-free? Yes Yes Yes Contributions taxed on withdrawal? No Yes Yes Earnings taxed on withdrawal? No Yes Yes Contributions permitted after age 70 1/2? Yes No No Distributions required after 70 1/2? No Yes Yes 10% early withdrawal penalty prior to age 59 1/2? Earnings only, unless withdrawal is a permissible exception. Yes, unless withdrawal is a permissible exception. No eligibility restrictions Earnings only, unless withdrawal is a permissible exception. *For those who participate in an employer-sponsored plan, contributions may be fully or partially deductible, depending on the following income AGI (Adjusted Gross Income) limits shown and tax-filing status. For those who do not participate in an employer-sponsored retirement plan, contributions are fully deductible regardless of income or tax-filing status. **Must be 50 or older as of 12/31 of calendar year. Contributions previously taxed can be withdrawn tax-free at any time. Earnings may be withdrawn tax-free after 5 years if you are 59 1/2 years old, purchasing a first home ($10,000 maximum withdrawal), or in the event of disability or death. Earnings also may be withdrawn without incurring the 10% early withdrawal penalty for post-secondary school education expenses. Income taxes would be due on such distributions. Consult with your tax advisor for current IRA eligibility requirements and annual contribution limits.

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