ROTH IRA
WHAT IS A ROTH IRA?
A Roth IRA is a personal retirement plan into which eligible participants can make after-tax contributions. The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997. A benefit of a Roth IRA is that an owner may take distributions from it tax free, provided that the account is at least five years old and the account holder is 591⁄2 or older.
WHAT MAKES YOU ELIGIBLE TO SET UP A ROTH IRA?
You may make the maximum Roth contribution provided that your Adjusted Gross Income (AGI) does not exceed the low end of the following ranges. For 2010, Roth contributions are reduced (phased out) if your modified AGI for your applicable tax filing status is within the ranges of the following chart:
|
|
|
|
|---|---|---|---|
2010 |
$105,001 - $120,000 |
$166,001 - $ 176,000 |
$1 - $10,000 |
As an example, assume a married individual filing a joint tax return with an AGI of $160,000. In this situation, the individual would be eligible to make a full contribution to a Roth IRA (see chart below to determine contribution limits). If the individual’s AGI was $170,000, only a partial contribution would be allowed. If the individual’s AGI was $176,000, no Roth contribution would be permitted.
Unlike the Traditional IRA, there are no limitations based on whether you are an active participant in an employer-sponsored plan. Also, contrary to a Traditional IRA, contributions may be made beyond age 701⁄2 provided you still have earned income.
HOW MUCH MAY BE CONTRIBUTED TO A ROTH IRA?
You may contribute the lesser of 100% of income or the maximum contribution allowed in the corresponding tax year. See the chart below for the maximum aggregate contribution allowed for all IRAs during the tax year:
|
|
|
|---|---|---|
2009 |
$5,000 |
$6,000 |
2010 |
$5,000 |
$6,000 |
Additionally, if you are age 50 or older for the tax year of the contribution, an additional catch-up amount can be contributed. This catch-up option allows an additional $1,000 to be contributed during the tax year.
As a working spouse, you may also contribute to a Roth IRA on behalf of your non-working spouse provided you file a joint tax return and your Adjusted Gross Income doesn’t exceed the limitations set forth above.
WHAT ARE THE RESTRICTIONS ON A ROTH IRA DISTRIBUTION?
As a Roth IRA owner, you may withdraw Roth funds at any time. In order to enjoy one of the primary benefits of a Roth IRA, the withdrawal must be a “qualified distribution”. If so, the funds (including any interest earned) may be withdrawn tax-free and the 10% penalty tax will not apply. In order to be considered a “qualified distribution”, the distribution must be after the fifth-taxable year period beginning with the first taxable year for which you first made a regular (non-rollover) contribution to a Roth IRA and one of the following conditions must also be met.
Payment or Distribution is Made:
- On or after the date you reach age 591⁄2
- To a beneficiary or to your estate after your death
- Because you are disabled
- As a Qualified special purpose first time homebuyer distribution ($10,000 limit)
CAN YOU TRANSFER/ROLLOVER EXISTING RETIREMENT ACCOUNTS TO A ROTH IRA?
Yes, you may transfer existing Roth IRA funds to another Roth IRA. Beginning in 2008, proceeds of other types of retirement accounts can be transferred/rolled directly into a Roth IRA. Since most other types of retirement accounts consist of pre-tax money, the money would be converted into a Roth IRA. Please consult your tax advisor for eligibility requirements and other details concerning Roth IRA conversions.