Roth IRAs
Why participate in a Roth IRA?
·Earnings accumulated tax-free
·Qualified distributions are tax and penalty free
·Contributions can always be recovered tax and penalty free
Contribution Limits
Roth IRA contribution limits are identical to those for the traditional IRA. However, unlike traditions IRAs, the ability of a participant to contribute to a Roth IRA may be limited by his or her adjusted gross income.
Married Filing Jointly:
$5,000 contribution limit if under the age of 50 and your combined income is $173,000 or less
$6,000 contribution limit if over the age of 50 and your combined income is $173,000 or less
Your Roth IRA contribution limit phases out between $173,001 and $183,000
Single, Head of Household, or Married Filing Separately:
$5,000 contribution limit if under 50 and income is less than $110,000
$6,000 contribution limit if over 50 and income is less than $110,000
Your Roth IRA contribution limit phases out between $110,001 and $125,000
** For participants who are eligible to make an IRA contribution and have attained the age of 50 before the end of the taxable year, the participant can make a “catch-up” contribution in addition to the normal contribution amount as shown in the table above. For the year 2006 and beyond, the “catch-up” contribution limit will be $1000. The maximum contribution cannot exceed 100% of actual compensation.
** As of 2010, there are no income limits/restrictions on IRA to Roth IRA conversions. Call us today to get started on converting your IRA to a Roth IRA.
Things to Remember
- Who can contribute? Any individual with income, subject to income limitations.
- Contributions are aggregated with Traditional IRA Contributions. The contributions to a Roth IRA are aggregated with contributions to a traditional IRA for the purpose of the annual maximum contribution limit. Essentially, an individual may contribute to both a traditional and a Roth IRA for a given year, but the total amount of contributions to both accounts may not exceed $5,000 for a tax year 2011 or 2012. (Note: $6,000 for individuals over age 50).
- Deductibility of Roth IRA Contributions: Contributions to a Roth IRA are not deductible. All contributions to a Roth IRA can be recovered tax and penalty free.
- Contributions are permitted after age 70 ½.
- Distributions from a Roth IRA are tax and penalty free after the five year holding period has passed and the participant has either reached age 59 ½, has died or has used the distribution for a qualified first time home purchase (limit to $10,000 over a lifetime). Other exceptions may also apply. Visit www.irs.gov for more details.
- Earnings on contributions will be subject to a 10% penalty by the IRS if withdrawn prior to mandatory five-year holding period and prior to age 59 ½.
- Contributions may be made (and account may be established) no later than the due date for filing income tax returns for the year for which the contribution is being made, not including extension, generally April 15th. In other words, contributions for a prior year can be made up to April 15th of the current year unless the IRS grants an extension.
Roth Rollover and Conversion Contributions
Qualified rollover contributions to a Roth IRA include Roth-to-Roth IRA rollovers and conversion of traditional IRA assets to a Roth IRA. Rollovers from an employer-qualified plan to a Roth IRA are not permitted.
Roth-to-Roth IRA Rollovers
Rollovers of assets from one Roth IRA to another Roth IRA follow the rules for traditional IRA rollovers. For assets to be eligible for rollover they must have come from an account that has had no rollover contributions or distributions within the prior 12 months. Roth-to-Roth rollovers are reported to the IRS.
Conversion from a Traditional IRA to Roth IRA
Any conversion of assets from a traditional IRA to a Roth IRA after 1998 fully includes in the gross income of the IRA participant in the year in which the distribution from the IRA is made. The rules for recovery of nondeductible contributions from the traditional IRA will apply. The 10% additional tax that applies to premature distributions will not apply to distributions that
are converted to a Roth IRA.
Please note that as of 2010, there are no income limits on IRA to Roth IRA conversions.
A Traditional IRA participant is prohibited from converting a required minimum distribution into a Roth IRA.
Distribution of assets from the traditional IRA will be reported on IRS Form 1099R, and the conversion contribution to the Roth IRA will be reported on IRS Form 5498.
Re-characterization
A participant may re-characterize contributions in one of three ways:
- By transferring a regular contribution made to a Roth IRA plus earnings to a traditional IRA. This may occur when a participant learns that she is ineligible to make a Roth IRA.
- By transferring a regular contribution made to a traditional IRA plus earnings to a Roth IRA. This may occur when a participant learns that he will be ineligible to take a deduction for his traditional IRA contribution.
- By reversing a contribution plus earnings made from a traditional IRA to a Roth IRA. This may occur when the IRA participant's adjusted gross income is too high to allow the Roth conversions.
Regardless of the type of re-characterization, both the distribution and the contribution are reported to the IRS.
Roth IRA Distributions
Qualified Distributions
Qualified Distributions from a Roth IRA may be recovered tax and penalty free if the distributions satisfy two conditions:
1.The distribution is made from the Roth IRA after a period of five years has elapsed since the first day of the year in which the first contribution was made to the Roth IRA, and;
2.One of the following conditions is satisfied:
i.The participant had attained the age of 59½
ii.The distribution is made to the participant's beneficiary after the participant's death
iii.The participant is disabled
iv.The distribution is used for qualified first time home purchase expenses
v.The distribution is used for qualified education, medical or unemployment expenses. Visit http://www.irs.gov for more details.
If the Roth IRA distribution meets both of the conditions above, the distribution is not included in the gross income of the individual.
Non-qualified Distributions
A distribution from a Roth IRA that does not meet the requirements of a qualified distribution, and is neither rolled over to another Roth IRA nor re-characterized to a traditional IRA, is considered a non-qualified distribution.
- A non-qualified distribution is taxable only when all of the aggregate contributions in the Roth IRA have been distributed. In other words, only the earnings in a Roth IRA are taxable when a distribution is non-qualified.
- The IRS has implemented ordering rules that define the order in which distributions are made from a Roth IRA. Distributions are made first from regular Roth IRA contributions, next from conversion contributions, and finally from earnings.
- The taxable portion of the non-qualified distribution may be subject to the 10% additional tax on premature distributions if it does not qualify for any of the exceptions to the premature distribution penalty.
- The amount of a non-qualified distribution that comes from conversion contributions maybe subject to an additional 10% penalty, if the distribution is made before 5 years have elapsed, since the first day of the year in which the conversion was made.
Withholding
Distributions from a Roth IRA are subject to federal income tax withholding at the rate of 10% unless the participant elects to waive withholding.
Required Distributions at Age 70 ½
Roth IRA accounts are not subject to the required minimum distribution regulations.
IRS Reporting Requirements for Roth IRAs
Tax reporting requirements for a Roth IRA are identical to those for a traditional IRA.
Deductible limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax adviser.
For more information visit www.irs.gov
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