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What Is a Roth IRA?
A Roth IRA allows only nondeductible contributions
but features tax-free
withdrawals
for certain
distribution reasons after a five-year holding period.
The term "tax free" means free from federal
income taxes.
Am I Eligible for a Roth IRA?
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
tables below).
How Much Can I Contribute Each Year?
You may contribute any amount up to the lesser of
100 percent of your earned income or the maximum
contribution amount (MCA), if your MAGI is
within prescribed limits. These prescribed limits
for contribution are:
Single Filers
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MAGI of
$95,000 or Less
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MAGI Between
$95,000 and $110,000
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MAGI of
$110,000 or More
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| Full Contribution |
Partial Contribution |
No Contribution |
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Married, Joint Filers
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MAGI of
$150,000 or Less
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MAGI Between
$150,000 and $160,000
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MAGI of
$160,000 or More
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| Full Contribution |
Partial Contribution |
No Contribution |
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Married, Separate Filers
| MAGI Less Than $10,000 |
MAGI of $10,000 or More |
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Partial Contribution |
No Contribution |
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The Economic Growth and Tax Relief Reconciliation
Act (EGTRRA) of 2001 increases the MCA as shown
in the following chart.
| Tax Year |
Maximum Contribution Amount |
| 2002 - 2004 |
$3,000 |
| 2005 - 2007 |
$4,000 |
| 2008 |
$5,000 |
| 2009 and thereafter |
$5,000 + cost-of-living adjustment (COLA) |
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The MCA is the aggregate amount that you can
contribute to any Roth and/or traditional IRA in a
given year. For example, if you are younger than
age 50 and you contribute $500 to a traditional IRA for
2002, you can only contribute $2,500 to a Roth IRA.
To make up for lost retirement savings, EGTRRA
also added "catch-up" contribution ability for any
individual who reaches age 50 or older by the end of
his/her taxable year. The chart below shows these
additional amounts which will increase the MCA for
Roth and traditional IRA owners age 50 or older.
| Tax Year |
Catch-up Amount |
| 2002 - 2005 |
$ 500 |
| 2006 and thereafter |
$1,000 |
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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 are ready to
make a withdrawal, you pay no taxes on any of the
earnings that your contributions have 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 your
first contribution is made. After that, any earnings
you withdraw for a qualified distribution reason
are income tax free and penalty tax free. Qualified
distributions are:
- 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.
-
Qualified first-time home buyer distributions
(up to $10,000).
Does the 10 Percent Premature-Distribution
Tax Apply if I Withdraw My Money Before
Age 59 1/2?
The 10 percent penalty tax does not apply to
earnings you withdraw when you take any of
the qualified distributions listed above. The
10 percent penalty tax is also waived for certain
other distribution reasons. But, income 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 higher education 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 paid directly to the IRS due to
IRS levy.
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 penalty
tax on any earnings withdrawn.
What if I Need Access to My Money Now?
A helpful feature of the Roth IRA is that, for
nonqualified
distributions, original contribution
amounts
are returned first. Contributions are not
subject
to taxation or the 10 percent premature-distribution penalty
tax when distributed. In other words,
you can always withdraw your principal
income tax free and penalty tax 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. That’s another advantage of the Roth
IRA over the traditional IRA. 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 rights
to the balance in your Roth IRA. Distributions to
the beneficiary (ies)
will be made in accordance
with the required minimum distribution rules and
your IRA agreement.
Can I Move Funds From a Traditional IRA
to a Roth IRA?
The law allows a single or joint income tax filer
with a MAGI of $100,000, or less, to convert
his/her traditional IRA into a Roth IRA. For
married taxpayers filing joint returns, the $100,000
limit for conversion eligibility applies to the
couple’s joint MAGI. A married individual who
files a separate return is not eligible to convert.
(Specific rules may apply in this case; please seek
professional tax or legal guidance.)
For a conversion to a Roth IRA, the amount
converted will be subject to income taxes. How-ever,
the funds will not be subject to a 10 percent
premature-distribution penalty tax.
What Is the Contribution Deadline for Funding a Roth IRA?
For a given taxable year, you can open and fund a
Roth IRA any time between January 1 and the date
your tax return is due for the year, excluding
extensions. For most taxpayers, this is April 15 of
the following year.
How Do I Open a Roth IRA?
See any of our IRA representatives. We will explain
the nature of these accounts in more detail, and help
you complete the forms necessary to establish your
Roth IRA.
This brochure is effective for tax-year 2002 and thereafter. This
brochure is
intended to provide general information concerning Roth IRAs. It
is not
intended to provide legal advice or to be a detailed explanation
of the rules
or how such rules may apply to your individual circumstances. For
specific
information, you are encouraged to consult your tax or legal
professional.
IRS Publication 590, Individual Retirement Arrangements, and the
IRS’
web site, www.irs.gov, may also provide helpful information.
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© Copyright Bank of Zumbrota 2000.