Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, 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)
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 2
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 3
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.
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 4
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 5
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 6
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 7
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 8
Maximum Annual Contribution Amount (2009)
Type Dollar Limit
Regular $5,000
Catchup (age 50 and older) $1,000
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 9
Tax Implications: Contribution Rules (cont)
2. AGI Phase-out
contribution limits phase out for higher incomes
Roth Phase-out AGI Limits (2009)
Unmarried individuals $105,000-120,000
Married joint return filers $166,000-176,000
Married separate filers $0-10,000
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 10
Tax Implications: Contribution Rules (cont)
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 11
Tax Implications: Contribution Rules (cont)
4. Saver’s Credit
limited nonrefundable tax credit available to certain lower income taxpayers who make contributions to a Roth IRA
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 12
Tax Implications: Contribution Rules (cont)
5. employer-sponsored Roth IRAs
– as limited alternative to a qualified retirement plan
– a “deemed IRA” as part of qualified plan
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 13
Tax Implications: Contribution Rules (cont)
6. Qualified Roth contribution programs
can amend Section 401(k) or Section 403(b) plan so contributions and distributions treated like Roth IRA
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 14
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 15
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 16
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 17
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
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 18
Tax Implications: Rollovers (cont)
3. Traditional IRA or qualified plan (or part of one) can be rolled over to a Roth IRA
– no conversion (in years before 2010)
• if IRA owner’s AGI > $100,000, or
• if married and file separate return
IRA or qualified plan taxable as ordinary income in year of conversion
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 19
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.
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 20
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.
Roth IRA Chapter 6Employee Benefit & Retirement Planning
Copyright 2009, The National Underwriter Company 21
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?