Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 What is it? A form of IRA that –accepts contributions

Roth IRA Chapter 6Employee Benefit & Retirement Planning

Copyright 2011, The National Underwriter Company 1

What is it?

A form of IRA that

– accepts contributions (to certain limits) on a nondeductible basis

– provides tax free withdrawals (within certain limits)



When is it indicated?

1. similar to traditional IRA, indicated when:

– want to defer taxes on investment income

– long-term accumulation, especially for retirement, is an important objective

– supplement or alternative to qualified retirement plan desired



When is it indicated? (cont)

2. Roth IRA is preferred to traditional IRA when the particular tax benefits under a Roth IRA are a better match for individual’s planning needs.



Advantages

1. eligible individuals may contribute up to a specified limit annually

2. withdrawals tax free if

– after 5 year wait and

– upon death or disability,

– first time home purchase, or

– after age 59½



Advantages (cont)

3. Roth IRA contribution eligibility not restricted by active participation in employer’s retirement plan

4. Roth IRA contributions can be made after age 70½

5. Roth IRAs not subject to required minimum distribution rules until death of owner



Disadvantages

1. Roth IRA contributions limited each year; limit reduced if annual adjusted gross income exceeds certain thresholds

2. early Roth IRA withdrawals in excess of contributions taxed in full and subject to 10% penalty



Tax Implications: Contribution Rules

1. Contribution Limits

maximum contribution is LESSER of

– the dollar limit

or

– 100% of earned income LESS contributions to traditional deductible or nondeductible IRA



Maximum Annual Contribution Amount (2011)

Type Dollar Limit

Regular $5,000

Catchup (age 50 and older) $1,000



Tax Implications: Contribution Rules (cont)

2. AGI Phase-out

contribution limits phase out for higher incomes

Roth Phase-out AGI Limits (2011)

Unmarried individuals $107,000-122,000

Married joint return filers $169,000-179,000

Married separate filers $0-10,000




3. Time Limits

Roth IRA can be established any time prior to due date of tax return without extension

no restrictions on contributions made to Roth after taxpayer reaches age 70½




4. Saver’s Credit

limited nonrefundable tax credit available to certain lower income taxpayers who make contributions to a Roth IRA




5. employer-sponsored Roth IRAs

– as limited alternative to a qualified retirement plan

– a “deemed IRA” as part of qualified plan




6. Qualified Roth contribution programs

can amend Section 401(k) or Section 403(b) plan so contributions and distributions treated like Roth IRA



Tax Implications: Distribution Rules

1. Treat all Roth accounts as single account when calculating tax consequences of distributions

distributions tax free IF made 5 yrs after first contribution and made

– on or after age 59½– after death to a beneficiary or estate– because individual totally and permanently disabled– for first time home purchase



Tax Implications: Distribution Rules (cont)

2. If Roth IRA distribution is not tax-free as a qualified distribution, total of original nondeductible contributions are treated as distributed first and return of nondeductible contributions is not taxable

10% early distribution penalty imposed on taxable amount unless distribution meets exceptions

3. No minimum distribution requirements at age 70½

• but distributions required after death



Tax Implications: Distribution Rules (cont)

4. Roth IRA must be distributed within 5 years of owner’s death unless owner has a designated beneficiary

If have designated beneficiary, Roth IRA can be distributed over life or life expectancy of beneficiary if begin distributions within one year of decedent's death



Tax Implications: Rollovers

1. can roll over one Roth IRA to another Roth IRA tax-free

– must complete transaction in 60 days

– only 1 rollover per IRA within 12-month period

2. cannot roll over Roth IRA to traditional IRA or to qualified plan or tax deferred annuity



Tax Implications: Rollovers (cont)

3. Traditional IRA or qualified plan (or part of one) can be rolled over to a Roth IRA– in years before 2010 no conversion

• if IRA owner’s AGI > $100,000, or

• if married and file separate return

– conversion limits do not apply for conversions after 2009

IRA or qualified plan taxable as ordinary income in year of conversion



True or False?

1. Alice, age 60, has a 6 year old Roth IRA. Alice can withdraw her initial investment and all investment income and gains tax free.

2. Unlike a traditional IRA, no withdrawals from a Roth IRA incur a penalty tax.

3. Amounts contributed to a traditional IRA reduce the amount available to contribute to a Roth.



True or False? (cont)

4. The first time homebuyer exception can be used anytime the individual or their spouse did not own a principle residence within the preceding two years.

5. A Roth IRA can be rolled over to a traditional IRA.



Discussion Question

1. If a taxpayer is eligible for the maximum annual contribution to either a traditional or a Roth IRA, which should be chosen?

2. Is it advisable to convert a traditional IRA to a Roth IRA, assuming that the $100,000 AGI test has been met?

Documents

Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2011, The National Underwriter Company1 What is it? A form of IRA that –accepts contributions