Roth IRA

What is a Roth IRA?

The Roth IRA is a non-deductible account that features tax-free withdrawals for certain reasons after a five year holding period. Since Roth IRA contributions are non-deductible and taxed in the year they are earned, people who expect to be in a higher tax bracket when they retire may benefit more from these accounts than from a Traditional IRA.

Am I eligible for a Roth IRA account?

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 view the current contribution limits at http://ira.com/faq/faq-05.htm

Do I pay taxes on my earnings?

No (provided you take the earnings as part of a qualified distribution). That's the best part of the Roth IRA. Unlike a Traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Roth IRA. However, when you're 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 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 distribution 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 penalty for 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 reason. 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 Distributions that are subject to taxes (on any earnings withdrawn) but no penalty include: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 education expenses, and
Distributions taken within the first five years for any of these reasons:
- age 59 1/2
- death
- disability
- 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 a 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 principle tax free and IRS penalty free for any reason.

When do I have to start taking distributions form my Roth IRA?

You never have to take distributions from your Roth IRA. That's 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 $100,000 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-months rule.

When is the contribution deadline for funding a Roth IRA?

Roth IRAs for the taxable year can be opened and funded any time 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.

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