What Is Roth IRA?
The Roth IRA is a nondeductible account that features tax-free withdrawals for certain
distribution reasons after a five-year holding period.
Am I Eligible For A Roth IRA?
Basically, there are two requirements for eligibility to contribute to a Roth IRA: you
must have earned income (or your spouse must have earned income) and your modified
adjusted gross income (MAGI) cannot exceed certain limits (see below).
How Much Can I Contribute?
You may contribute any amount up to 100 percent of your earned income or $2,000,
whichever is less, as long as your MAGI is within prescribed limits. The prescribed
limits for contribution are:
| SINGLE FILERS |
| MAGI of $95,000 or Less |
MAGI Between $95,000 & $110,000 |
MAGI of $110,000 or More |
| Full $500 Contribution |
Partial Contribution |
No Contribution |
| MARRIED FILERS |
| MAGI of $150,000 or Less |
MAGI Between $95,000 & $110,000 |
MAGI of $110,000 or More |
| Full $500 Contribution |
Partial Contribution |
No Contribution |
Ităs important to note that $2,000 is the aggregate amount that you can contribute
to any Roth and/or traditional IRA in any given year. For example, if you contribute
$500 to a traditional IRA, you can only contribute $1,500 to a Roth IRA for that year.
Do I Pay Taxes On My Earnings?
No (provided you take the earnings as part of a qualified distribution). Thatăs the
best part of the Roth IRA. Unlike a traditional IRA, you cannot take a tax deduction
for any of the contributions that make to a Roth IRA. However, when youăre ready to
take a withdrawal, you pay no taxes on any of the earnings that your money has generated.
What Is A Qualified Distribution?
In order for earnings to be tax free, you must first meet a five-year holding period for
your Roth IRA. This period begins with the tax year for which the first contribution is
made. After that, any earnings you withdraw for a qualified withdrawal reason are tax
free and IRS penalty free. Qualified distributions include:
- Distributions made on or after the date on which you attain age 59 1/2,
- Distributions made to your beneficiary (or your estate) upon your death,
- Distributions attributable to your being disabled, and
- Qualified first-time home buyer distributions (up to $10,000).
Does the 10 Percent IRS Premature Distribution Apply If I Withdraw My Money Before Age 59-1/2?
The 10 percent IRS penalty does not apply to earnings you withdraw when you take any of
the qualified distributions listed above. In addition, the 10 percent penalty is also
waived for certain other distribution reasons. But, for these distributions, taxes on
any earnings will apply. Distributions that are subject to taxes (on any earnings withdrawn)
but no penalty include:
- Substantially equal periodic payments,
- Eligible medical expenses in excess of 7.5 percent of your adjusted gross income (AGI),
- Medical insurance premiums for eligible unemployed individuals,
- Qualified educational expenses,
- Distributions taken within the first five years for any of these reasons: age 59-1/2,
death, disability, or first time home purchase.
Distributions taken for any reason other than a qualified reason or one of the reasons
listed here are subject to both taxes and the 10 percent IRS penalty on any earnings withdrawn.
What If I Need Access To My Money Now?
A helpful feature of the Roth IRA is that, for non-qualified distributions, original
contribution amounts are returned first. Contributions (as opposed to earnings) are not
subject to taxation or the 10 percent IRS premature distribution penalty when distributed.
In other words, you can always get back your principal tax free and IRS penalty free for any reason.
When Do I Have To Start Taking Distributions From My Roth IRA?
You never have to take distributions from your Roth IRA. Thatăs another benefit of the Roth
IRA over traditional IRAs. Assets held in a Roth IRA are not subject to age 70-1/2 required
minimum distributions.
What Happens In The Event Of My Death?
Your named beneficiary(ies) will receive the entire proceeds of your Roth IRA. The manner
in which your beneficiary(ies) receives the funds is determined by the election made by
your beneficiary(ies) within the guidelines of the law.
How Do I Move Funds From A Traditional IRA To A Roth IRA?
The law only allows people (single or married) with a MAGI of $1000,000 or less to convert
or roll over their traditional IRA into a Roth IRA. For a rollover or conversion to a Roth
IRA, the amount rolled over or converted will be subject to full taxation. However, the
funds will not be subject to a 10 percent premature distribution penalty. Rollovers from
a traditional IRA to a Roth IRA are not subject to the one rollover per 12 month rule.
Additionally, the law provides that for conversion/rollovers to Roth IRAs completed in 1998
the taxes will be paid ratably over a four-year period. After 1998, such conversions/rollovers
are fully taxable in the year of the distribution.
When Is The Contribution Deadline For Funding A Roth IRA?
Roth IRAs for the taxable year can be opened and funded anytime in between January 1 and the
date your tax return is due for the year, excluding extensions. This is normally April 15 of
the following year.
How Do I Open A Roth IRA?
Simply see one of representatives. We will explain the nature of these accounts in more detail
and help you complete the simple forms necessary to establish you Roth IRA.
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