ROTH Individual Retirement Accounts (IRAs) are personal retirement plans that grow tax free even upon withdrawal but there is no tax deduction available for contributions. To be considered a ROTH IRA the account or annuity must be designated as a ROTH IRA when it is setup. To avoid any penalties for withdrawing your money from a ROTH IRA the account holder must reach 59 1/2 years of age and have had the account for at least five years. Even then it is only the profits from the account that are subject to tax and a 10% early withdrawal penalty. Also, with a ROTH IRA you can leave your money in a ROTH IRA as long as you live and there are no required minimum distributions as long as you are alive.
IRAs are separate individual accounts, they are not eligible for joint accounts. An individual can contribute to a ROTH IRA at any age, unlike a Traditional IRA in which you can only make contributions as long as the account holder does not reach 70 ½ years of age before the end of the tax year. To qualify to make a contribution to a ROTH IRA you must have taxable compensation and if married filing joint either you or your spouse must have taxable compensation. For additional information on taxable compensation see IRS Publication 590.
There are several factors that determine if you can contribute to a ROTH IRA and what amount you are limited to. For this information see IRS Publication 590 or to discuss your situation call me at 972-432-1955 or send me an email at firstname.lastname@example.org.
It is also important to note that there is an that applies to all to a ROTH IRA. The excise tax is 6% of the excess contributions. Any excess contributions that are removed by the due date of your tax return are not considered excess contributions as long as you also remove the profits on the excess contributions as well. Excess contributions may also be applied to a later year. For more information on excess contributions see IRS Publication 590.
Contributions to a ROTH IRA can be made anytime during the year and up to the due date of your tax return.
Many are excited about the opportunity to convert money from a Traditional IRA to a ROTH IRA in 2010 without limitations based on your modified AGI. However, untaxed contributions and profits that are converted will be subject to tax in the year of the conversion or you can choose to split the income subject to tax from 2010 and apply it in equal amounts to 2011 and 2012. If you have losses to offset the income from a ROTH conversion it is exciting that you could make a tax-free conversion to a ROTH IRA. In most cases the tax-free conversion would seem to make sense. But as you can see a ROTH conversion can get confusing. Feel free to call me or email me to discuss a conversion for yourself. Also, if you are considering a conversion to a ROTH IRS there is more information to consider in the post on ROTH IRA Coversions. Be mindful that coversions to ROTH IRAs for 2010 must be done before the end of the tax year.
Again, there no required distributions for you from your ROTH IRA as long as you are alive.
When a plan holder dies their heirs generally must receive the entire amount of the plan within five years of the owner’s death or over the beneficiary’s life starting within one year of the owner’s death. If the distributions are from an annuity the IRS requires per Publication 590 “the entire interest must be payable over a period not greater than the designated beneficiary’s life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.” For more information on required distribution amounts see the IRS Publication 590.
As mentioned previously early distributions of untaxed profits, before you turn 59 1/2 and have the account for at least 5 years, can be subject to an additional 10% early withdrawal penalty. There are several exceptions to the early distribution penalty including if you have inherited the IRA, if you are disabled, if you have significant unreimbursed medical expenses, or if the distributions do not exceed your qualified higher education expenses. For a complete list of exceptions see the IRS Publication 590. Also, if you need money to finance a business venture consider that you may have other options than taking withdrawals from your IRA. Give me a call at 972-439-1955 if you have this situation.
Considerations: Before making IRA contributions you should consider “can I afford to make this contribution?” In other words, you should consider do I need this money now or will I need it before I turn 59 1/2 years of age. Take a look at your overall financial picture. Do you have debts that need to be paid? What would happen if you became unemployed for an extended period of time? If you work with a financial adviser it would be beneficial to go over these points with them. Also, you want to look at your expectations for your retirement and plan to have access funds that will be taxable and those that will not be taxable to minimize your taxes and maximize your available money to live off of during retirement. If you would like to discuss these issues with me feel free to give me a call at:
Jeff Haywood, CPA
These posts provide highlights that may be of interest to taxpayers. For complete information on these subjects check with the IRS and your financial consultants.
I prepare the following types of tax returns:
Federal and State Returns
Also, I am available for tax planning and discussions about business, retirement planning and life goals.
For more US income tax content see the following links:
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ROTH IRA Conversion
As always keep in mind that the content provide on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.