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What is a Roth Individual Retirement Account (IRA)?
A new type of IRA, established in the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.
What is the tax benefit realized from a Roth IRA?
A Roth IRA will produce tax-free income if certain rules are met.
What is the basic concept of a Roth IRA and what are the associated tax benefits?
If you are eligible, you may make contributions, within limits, to the Roth IRA. You make these contributions with after-tax dollars. The earnings realized by the Roth IRA are not presently taxed, and if certain distribution rules are met, will never be taxed. For example, if you are 42 on January 1, 2002, and you contribute $1,000 a year for 34 years (2002-2035) to a Roth IRA, then your contributions of $34,000 would accumulate to $110,434.88 as of December 31, 2035, if an earnings rate of 6 percent compounded annually was realized. You and your beneficiary(ies) would, of course, not pay any federal income tax on the contribution amount of $34,000 when distributed, because you cannot claim a tax deduction for your contributions. However, the great tax benefit to be realized from a Roth IRA is that you and your beneficiary(ies) will not have to include in your taxable income the earnings of $76,434.88 (and subsequent future earnings) when distributed to you or your beneficiary(ies) as long as the distributions are qualified distributions as defined later. You are not required to withdraw any required distribution amount from a Roth IRA while you are alive. And, even though your beneficiaries will be requried to receive certain required distributions, these distributions will be made over a number of years. This means the funds (contributions and earnings) inheritied within your Roth IRA will continue to accumulate for some time within the inherited Roth IRA and will not be taxed when distributed. These are great tax benefits.
When do I have to establish the Roth IRA?
You have until the due date (without extensions) for filing your federal income tax return, normally April 15, to establish and fund your Roth IRA for the previous tax year.
Am I eligible to contribute to a Roth IRA?
You are eligible if you satisfy the following two requirements: (1) you have earned income or compensation; and (2) you meet certain income limitations. Be aware that you are eligible to make contributions to a Roth IRA even though you are age 70 1/2 or older. For a given year, you may be ineligible to contribute to a Roth IRA because of income limits, but still be eligible to contribute to a traditional IRA and/or a Coverdell Education Savings Account.
What are the income limits for eligibility purposes?
The compensation range applying to Roth IRA contributions have increased for 2015.
- The 2015 compensation range applying to a person whose filing status is single, head of household or qualifying widower is $116,000 - $131,000 up from $112,000 - $127,000
- The 2015 compensation range applying to a person whose filing status is married/joint return is $183,000 - $193,000 up from $178,000 - $188,000
- The 2015 compensation range applying to a person whose filing status is maried but filing a separate return is unchanged at $0 - $10,000.
What are the contribution limits for a person under age 50?
Tax Year Amount
2004 $3,000.00
2005-2007 $4,000.00
2008-2012 $5,000.00
2013-2015 $5,500.00
What are the contribution limits for a person who is age 50 or older?
Tax Year Amount
2002-2004 $3,500.00
2005 $4,500.00
2006-2007 $5,000.00
2008-2012 $6,000.00
2013-2015 $6,500.00
When may I start to withdraw money or assets from my Roth IRA?
You may begin withdrawals at any time. However, you will want to understand the income tax consequences of taking distributions at certain times.
What distributions froma Roth IRA will be tax free?
"Qualified distributions" will be tax free. To be a qualified distribution, the distribution must occur after you have met the five-year holding requirement, and the distribution is made to you (1) after you have attained age 59 1/2, (2) after you have become disabled, (3) because of a first-time home purchase, or (4) to your beneficiary after your death.
What distributions from a Roth IRA will be taxed?
To the extent that a non-qualified distribution is the return of earnings on your contributions, you will need to include this distribution amount in income and pay the related tax.
Will the 10 percent excise tax ever be assessed?
Yes. If you are not yet 59 1/2 (and none of the other exceptions apply at the time you withdraw funds from your Roth IRA), then you will be liable to pay the 10 percent excise tax on that portion of the distribution which is taxable. You will not pay the 10 percent excise tax when your contributions or basis is returned to you.
Must I commence required minimum distributions from my Roth IRA at age 70 1/2?
No. The required minimum distribution rules for living accountholders (age 70 1/2) do not apply to distributions from a Roth IRA.
What happens to my Roth IRA after I die?
The funds or assets in your Roth IRA will be paid to your designated beneficiaries in any way which either you or they elect, as long as the required minimum distribution rules for inherited Roth IRAs are satisfied over the beneficiary's life expectancy. As mentioned previously, your beneficiary will generally be able to maintain your Roth IRA as an inherited Roth IRA so that there will continue to be tax-free earnings for many years after your death.
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