The Roth IRA was introduced in 1998 as an alternative to the Traditional IRA. The most attractive feature of the Roth IRA are the ability to take tax-free distributions of potential earnings. Also, distributions are not required until the death of the account holder.
Individuals with earned income (and non-working spouse) regardless of plan participation status or age that fall within or under the modified adjusted gross income (MAGI) phase-out limits.
2014 Phase-Out Limits
Full annual contribution allowed if MAGI is less than:
IRA contribution is reduced if MAGI is:
IRA contribution NOT allowed if MAGI is greater than:
**If individual did not live with their spouse at any time during the year, their filing status is considered as single for this purpose.
Deduction of Contributions
Contributions are not deductible.
Basic Annual Contributions (2014)
Lesser of 100% of earned income or $5,500 (for each spouse). Aggregated with Traditional IRA contributions.
Catch-up Contributions (2014)
Roth IRA holders age 50 or older may contribute $1,000 (for each spouse) in excess of the basic annual contribution. Aggregated with Traditional IRA contributions.
May be established and contributions may be accepted for a particular tax year until the due date for filing the individual's federal income tax return --no extensions. When the due date for any act for tax purposes --filing a return, paying taxes, etc.-- falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.
All taxpayers are able to convert to a Roth IRA regardless of their MAGI (modified adjusted gross income) or tax filing status. All taxes on conversions will be due in the year converted.
Traditional, SEP, and/or SIMPLE (after 2 years from the first contribution) IRAs can be converted to Roth. Employer-sponsored plan balances can be converted to Roth IRAs. Eligible rollover distributions can be converted to a Roth IRA for employer sponsored plan participants. A surviving spouse inheriting a deceased spouse's employer sponsored retirement plan has the option to convert to a Roth or Inherited Roth IRA. A non-spouse beneficiary who inherits an a employer sponsored retirement plan is able to request a direct trustee-to-trustee transfer to an Inherited Roth IRA. A Roth conversion of after-tax amounts will not be taxable income. Any pre-tax amount converted will be included in the Roth IRA or Inherited Roth IRA holder's gross income for the year. The Pro-Rata Rule applies to a conversion from any Traditional, SEP and/or SIMPLE IRA.
None for the Roth IRA owner.
Qualified distribution are any distribution made after 5 years and age 59½, or for death, disability or first-time homebuyer exception. These distributions are tax-free and penalty- free.
Ordering rules for non-qualified distributions
1st- Distribution of contributions are tax-free and penalty-free and can be taken out anytime. Contributions are always the first dollars out of Roth IRAs. Because Roth contributions are never deductible, they are not subject to tax or early distribution penalty.
2nd- After the contribution basis is depleted the next dollars distributed are any converted amounts. Roth conversion amounts distributed after a five-year holding period has elapsed on that conversion or conversion amounts distributed after age 59½ are not subject to a 10 percent penalty. If a distribution is taken from a conversion prior to the five year holding period or age 59½ and none of the exceptions apply, the distribution is subject to the 10 percent tax penalty. Each conversion is subject to a separate 5 year holding period.
3rd- The last money distributed from a Roth is earnings. Any distributions of earnings are tax-free and penalty-free after 5 years andage 59½, death, disability or for first-time homebuyer exception. Earnings taken before the 5-year period has lapsed and the attainment of age 59½, or death, disability or for first-time homebuyer exception are subject to ordinary income tax and a 10% penalty unless one of the exceptions listed below applies.
Exceptions to 10% early distribution penalty
Exceptions include distributions due to age 59½, death, disability, substantially equal periodic payments (SEPP), eligible medical expenses, certain unemployed individual's health premiums, limited "first time" homebuyer, qualified higher education expenses, qualified reservist or IRS levy.
*Information offered as a guideline. As always, clients should defer to competent counsel for final tax and legal advice.