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Roth IRA Accounts In general, the requirements for participation in a Roth IRA are the same as those for a traditional IRA, except that a participant can contribute to a Roth IRA after attaining the age of 70 ½. ESTABLISHING A ROTH IRA
Regular Roth IRA Contributions Deadline for Regular Roth IRA Contributions The deadline for making regular Roth IRA contributions is the tax-filing deadline for the year, not including extensions (generally April 15). Roth IRA Contribution Limits Unlike traditional IRAs, the ability of a participant to contribute to a Roth IRA may be limited by his adjusted gross income. Roth IRA contribution limits are identical to those for the traditional IRA. For tax year 2002 maximum amount of regular contributions that can be contributed to a Roth IRA is the lesser of 100% of a participant's compensation or $3,000. The $3,000 maximum contribution limit is phased out depending upon the participant's modified adjusted gross income and filing status, as shown below:
To calculate the allowable contribution for a participant with modified adjusted gross income in the phase out range, do the following:
Contributions are Aggregated with Traditional IRA Contributions The contributions to a Roth IRA are aggregated with contributions to a traditional IRA for purposes of the annual maximum contribution limit. In other words, 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 $3,000 for tax year 2002. 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. Form of Roth IRA Contributions Regular contributions to a Roth IRA must be cash or cash equivalent (e.g. check, money order). 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 nor distributions within the prior 12 months. Roth-to-Roth rollovers are reported to the IRS. Conversion from a Traditional IRA to a Roth IRA Any conversion of assets from a traditional IRA to a Roth IRA after 1998 is fully includible in the gross income of the IRA participant in the year in which the distribution from the IRA is made. The rules for the recovery of non-deductible 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. If a taxpayers modified adjusted gross income exceeds $100,00 for a given tax year, or if the taxpayer is married and filing separately, he is not permitted to make a traditional to Roth IRA conversion. An IRA participant is prohibited from converting a required minimum distribution. 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-characterizations A participant may re-characterize contributions in one of three ways:
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:
Nonqualified 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 nonqualified distribution. A nonqualified 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 nonqualified. 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 nonqualified 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 nonqualified distribution that comes from conversion contributions may be 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 IRA's Tax reporting requirements for a Roth IRA are identical to those for a traditional IRA. WHY PARTICIPATE IN A ROTH IRA? Earnings accumulate tax-free. Qualified distributions are tax and penalty free. Contributions can always be recovered tax and penalty free. |
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