What is it? A form of IRA that accepts contributions (to certain limits) on a nondeductible basis

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)

2. When is it indicated? • 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

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.

4. Advantages • eligible individuals may contribute up to a specified limit annually • withdrawals tax free if • after 5 year wait and • upon death or disability, • first time home purchase, or • after age 59½

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

6. Disadvantages • Roth IRA contributions limited each year; limit reduced if annual adjusted gross income exceeds certain thresholds • early Roth IRA withdrawals in excess of contributions taxed in full and subject to 10% penalty

7. Tax Implications: Contribution Rules • Contribution Limits maximum contribution is LESSER of • the dollar limit or • 100% of earned income LESS contributions to traditional deductible or nondeductible IRA

9. Tax Implications: Contribution Rules (cont) • AGI Phase-out contribution limits phase out for higher incomes

10. Tax Implications: Contribution Rules (cont) • 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

11. Tax Implications: Contribution Rules (cont) • Saver’s Credit limited nonrefundable tax credit available to certain lower income taxpayers who make contributions to a Roth IRA

12. Tax Implications: Contribution Rules (cont) • employer-sponsored Roth IRAs • as limited alternative to a qualified retirement plan • a “deemed IRA” as part of qualified plan

13. Tax Implications: Contribution Rules (cont) • Qualified Roth contribution programs can amend Section 401(k) or Section 403(b) plan so contributions and distributions treated like Roth IRA

14. Tax Implications: Distribution Rules • 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

15. Tax Implications: Distribution Rules (cont) • 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 • No minimum distribution requirements at age 70½ • but distributions required after death

16. Tax Implications: Distribution Rules (cont) • 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

17. Tax Implications: Rollovers • 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 • cannot roll over Roth IRA to traditional IRA or to qualified plan or tax deferred annuity

18. Tax Implications: Rollovers (cont) • 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

19. True or False? • Alice, age 60, has a 6 year old Roth IRA. Alice can withdraw her initial investment and all investment income and gains tax free. • Unlike a traditional IRA, no withdrawals from a Roth IRA incur a penalty tax. • Amounts contributed to a traditional IRA reduce the amount available to contribute to a Roth.

20. True or False? (cont) • 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. • A Roth IRA can be rolled over to a traditional IRA.

21. Discussion Question • If a taxpayer is eligible for the maximum annual contribution to either a traditional or a Roth IRA, which should be chosen? • Is it advisable to convert a traditional IRA to a Roth IRA, assuming that the $100,000 AGI test has been met?