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Roth IRAs
The Roth IRA is a
type of IRA in which contributions are not deductible, but
distributions (including earnings) can be tax free if certain
conditions are met. Contributions to a Roth IRA are made with
monies on which taxes have already been paid. So the principal
amount is never again subject to taxes or penalties.
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| Named after the legislator who
proposed it, the Roth IRA provides enhanced savings
opportunities especially for those in higher tax brackets that
may not qualify for deductible IRAs, and for those people who
already participate in their employer's retirement plan. Regardless of your age, you may be able to establish and make
nondeductible contributions to an individual retirement plan called a Roth
IRA.
Contributions not reported. You do not have to report Roth IRA
contributions on your return.
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Traditional IRA
SEP & SIMPLE Plans
Education IRA
I'd Like More Information!
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Roth IRA contribution limit. If
contributions on your behalf are made only to Roth IRAs, your
contribution limit for 2005 will generally be the lesser of:
 | $4,000, or |
| Your taxable compensation for the year. |
If you are 50 or older in 2005 and
contributions on your behalf are made only to Roth IRAs, your
contribution limit for 2005 will generally be the lesser of:
| $4,500, or |
| Your taxable compensation for the year. |
However, if your modified AGI is above a
certain amount, your contribution limit may be reduced. For more
information, see How
Much Can Be Contributed?
Deemed IRAs. For plan years beginning after 2002,
a qualified employer plan (retirement plan) can maintain a separate
account or annuity under the plan (a deemed IRA) to receive voluntary
employee contributions. If the separate account or annuity otherwise
meets the requirements of an IRA, it will be subject only to IRA rules.
An employee's account can be treated as a traditional IRA or a Roth IRA.
For this purpose, a “qualified employer plan”
includes:
What is a Roth IRA?
Can I Contribute to a Roth IRA?
Can I Move Amounts Into a Roth IRA?
Are Distributions From My Roth IRA Taxable?
Must You Withdraw or Use Assets?
A Roth IRA is an individual retirement plan that is subject to the
rules that apply to a traditional IRA. It can be either an account or an
annuity. I
To be a Roth IRA, the account or annuity must be designated as a Roth
IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a
SEP-IRA nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth
IRA. But, if you satisfy the requirements, qualified distributions are
tax free. Contributions can be made to your Roth IRA after you reach age
70½ and you can leave amounts in your Roth IRA as long as you live.
When Can a Roth IRA Be Set Up?
You can set up a Roth IRA at any time. However, the time for making
contributions for any year is limited.
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Can You Contribute to a
Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable
compensation (defined later) and your
modified AGI (defined later) is less
than:
Is there an age limit for contributions?
Contributions can be made to your Roth IRA regardless of your age.
Can you contribute to a Roth IRA for your spouse?
You can contribute to a Roth IRA for your spouse provided the
contributions satisfy the spousal IRA limit, you file jointly, and
your modified AGI is less than $160,000.
Compensation. Compensation includes wages,
salaries, tips, professional fees, bonuses, and other amounts received
for providing personal services. It also includes commissions,
self-employment income, and taxable alimony and separate maintenance
payments.
Modified AGI. Your modified AGI for Roth IRA
purposes is your adjusted gross income (AGI) as shown on your return
modified as follows.
- Subtract conversion income.
This is any income resulting from the conversion of an IRA (other
than a Roth IRA) to a Roth IRA.
- Add the following deductions
and exclusions:
- Traditional IRA deduction,
- Student loan interest deduction,
- Tuition and fees deduction,
- Foreign earned income exclusion,
- Foreign housing exclusion or deduction,
- Exclusion of qualified bond interest shown on Form 8815,
and
- Exclusion of employer-provided adoption benefits shown on
Form 8839.
How Much Can Be Contributed?
The contribution limit for Roth IRAs depends on whether contributions
are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
Roth IRAs only. If contributions are made only to
Roth IRAs, your contribution limit generally is the lesser of:
| $3,000 ($3,500 if you are 50 or older; for 2005,
$4,000 or $4,500, if 50 or older), or |
| Your taxable compensation. |
However, if your modified AGI is above a certain amount, your
contribution limit may be reduced.
Roth IRAs and traditional IRAs. If contributions
are made to both Roth IRAs and traditional IRAs established for your
benefit, your contribution limit for Roth IRAs generally is the same as
your limit would be if contributions were made only to Roth IRAs, but
then reduced by all contributions (other than employer contributions
under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth
IRAs.
This means that your contribution limit is the lesser of:
| $3,000 ($3,500 if you are 50 or older; ; for
2005, $4,000 or $4,500, if 50 or older) minus all contributions
(other than employer contributions under a SEP or SIMPLE IRA plan)
for the year to all IRAs other than Roth IRAs, or |
| Your taxable compensation minus all contributions (other than
employer contributions under a SEP or SIMPLE IRA plan) for the year
to all IRAs other than Roth IRAs. |
However, if your modified AGI is above a certain amount, your
contribution limit may be reduced.
Simplified employee pensions (SEPs) are discussed in Publication 560.
Savings incentive match plans for employees (SIMPLEs) are discussed in
chapter 3.
Contribution limit reduced. If your modified AGI
is above a certain amount, your contribution limit is gradually reduced.
Figuring the reduction.
If the amount you can contribute must be reduced,
figure your reduced contribution limit as follows.
- Start with your
modified AGI.
- Subtract
from the amount in (1):
- $150,000 if filing a joint return or
qualifying widow(er),
- $–0– if married filing a separate
return, and you lived with your spouse at
any time during the year, or
- $95,000 for all other individuals.
- Divide the
result in (2) by $15,000 ($10,000 if filing a
joint return, qualifying widow(er), or married
filing a separate return).
- Multiply
the maximum contribution limit (before reduction
by this adjustment and before reduction for any
contributions to traditional IRAs) by the result
in (3).
- Subtract
the result in (4) from the maximum contribution
limit before this reduction. The result is your
reduced contribution limit.
When Can You Make Contributions?
You can make contributions to a Roth IRA for a year at any time
during the year or by the due date of your return for that year (not
including extensions).
You can make contributions for 2004 by the due date (not
including extensions) for filing your 2004 tax return. This means
that most people can make contributions for 2004 by April 15, 2005.
What If You Contribute Too Much?
A 6% excise tax applies to any excess
contribution to a Roth IRA.
Excess contributions. These are the
contributions to your Roth IRAs for a year that equal the
total of:
- Amounts contributed for the tax year to your Roth IRAs
(other than amounts properly and timely rolled over from a
Roth IRA or properly converted from a traditional IRA) that
are more than your contribution limit for the year (explained
earlier under How Much Can be
Contributed?), plus
- Any excess contributions for the preceding year, reduced
by the total of:
- Any distributions out of your Roth IRAs for the year,
plus
- Your contribution limit for the year minus your
contributions to all your IRAs for the year.
Withdrawal of excess contributions. For purposes of
determining excess contributions, any contribution that is
withdrawn on or before the due date (including extensions) for
filing your tax return for the year is treated as an amount not
contributed. This treatment only applies if any earnings on the
contributions are also withdrawn. The earnings are considered
earned and received in the year the excess contribution was made.
Applying excess contributions. If
contributions to your Roth IRA for a year were more than the
limit, you can apply the excess contribution in one year to a
later year if the contributions for that later year are less than
the maximum allowed for that year.
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Can You Move Amounts Into a
Roth IRA?
You may be able to convert amounts from either a traditional, SEP,
or SIMPLE IRA into a Roth IRA. You may be able to recharacterize
contributions made to one IRA as having been made directly to a
different IRA. You can roll amounts over from one Roth IRA to another
Roth IRA.
You can convert a traditional IRA to a Roth IRA. The conversion
is treated as a rollover, regardless of the conversion method used.
Most of the rules for rollovers apply to these rollovers. However,
the 1-year waiting period does not apply.
Conversion methods. You can convert amounts
from a traditional IRA to a Roth IRA in
any of the following three ways.
- Rollover. You can receive
a distribution from a traditional IRA and roll it over
(contribute it) to a Roth IRA within 60 days after the
distribution.
- Trustee-to-trustee transfer.
You can direct the trustee of the traditional IRA to transfer
an amount from the traditional IRA to the trustee of the Roth
IRA.
- Same trustee transfer. If
the trustee of the traditional IRA also maintains the Roth
IRA, you can direct the trustee to transfer an amount from the
traditional IRA to the Roth IRA.
Same trustee. Conversions made with the same trustee
can be made by redesignating the traditional IRA as a Roth IRA,
rather than opening a new account or issuing a new contract.
If, when you converted amounts from a traditional IRA or
SIMPLE IRA into a Roth IRA, you expected to have modified AGI
of less than $100,000 and a filing status other than married
filing separately, but your expectations did not come true,
you have made a failed conversion.
Results of failed conversions. If the
converted amount (contribution) is not recharacterized
(explained in chapter 1), the contribution will be treated
as a regular contribution to the Roth IRA and subject to the
following tax consequences.
- A 6% excise tax per year will apply to any excess
contribution not withdrawn from the Roth IRA.
- The distributions from the traditional IRA must be
included in your gross income.
- The 10% additional tax on early distributions may
apply to any distribution.
How to avoid. You must move the amount converted
(including all earnings from the date of conversion) into a
traditional IRA by the due date (including extensions) for
your tax return for the year during which you made the
conversion to the Roth IRA. You do not have to include this
distribution (withdrawal) in income.
You can withdraw, tax free, all or part of the assets from
one Roth IRA if you contribute them within 60 days to another
Roth IRA. Most of the rules for rollovers apply to these
rollovers. However, rollovers from retirement plans other than
Roth IRAs are disregarded for purposes of the 1-year waiting
period between rollovers.
A rollover from a Roth IRA to an employer retirement plan
is not allowed.
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Are Distributions
Taxable?
You do not include in your gross income
qualified distributions or
distributions that are a return of your regular contributions
from your Roth IRA(s). You also do not include distributions
from your Roth IRA that you roll over tax free into another Roth
IRA. You may have to include part of other distributions in your
income.
Basis of distributed property. The
basis of property distributed from a Roth IRA is its fair
market value (FMV) on the date of distribution, whether or not
the distribution is a qualified distribution.
Withdrawals of contributions by due date.
If you withdraw contributions (including any net earnings on
the contributions) by the due date of your return for the year
in which you made the contribution, the contributions are
treated as if you never made them. If you have an extension of
time to file your return, you can withdraw the contributions
and earnings by the extended due date. The withdrawal of
contributions is tax free, but you must include the earnings
on the contributions in income for the year in which you made
the contributions.
What Are Qualified Distributions?
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements.
- It is made after the 5-year period beginning with the
first taxable year for which a contribution was made to a
Roth IRA set up for your benefit, and
- The payment or distribution is:
- Made on or after the date you reach age 59½,
- Made because you are disabled,
- Made to a beneficiary or to your estate after your
death, or
- One that meets the requirements listed under
First home under
Exceptions in
chapter 1 (up to a
$10,000 lifetime limit).
Ordering Rules for Distributions
If you receive a distribution from your Roth IRA that is
not a qualified distribution,
part of it may be taxable. There is a set order in which
contributions (including conversion contributions) and earnings
are considered to be distributed from your Roth IRA. For these
purposes, disregard the withdrawal of excess contributions and
the earnings on them. Order the distributions as follows.
- Regular contributions.
- Conversion contributions, on a first-in-first-out basis
(generally, total conversions from the earliest year first).
Take these conversion contributions into account as follows:
- Taxable portion
(the amount required to be included in gross income
because of conversion) first, and then the
- Nontaxable portion.
- Earnings on contributions.
Disregard rollover contributions from other Roth IRAs for
this purpose.
Aggregation (grouping and adding) rules.
Determine the taxable amounts distributed (withdrawn),
distributions, and contributions by grouping and adding them
together as follows.
- Add all distributions from all your Roth IRAs during
the year together.
- Add all regular contributions made for the year
(including contributions made after the close of the year,
but before the due date of your return) together. Add this
total to the total undistributed regular contributions
made in prior years.
- Add all conversion contributions made during the year
together. For purposes of the ordering rules, in the case
of any conversion in which the conversion distribution is
made in 2004 and the conversion contribution is made in
2005, treat the conversion contribution as contributed
before any other conversion contributions made in 2005.
Add any recharacterized contributions that end up in a Roth
IRA to the appropriate contribution group for the year that
the original contribution would have been taken into account
if it had been made directly to the Roth IRA.
Disregard any recharacterized contribution that ends up
in an IRA other than a Roth IRA for the purpose of grouping
(aggregating) both contributions and distributions. Also
disregard any amount withdrawn to correct an excess
contribution (including the earnings withdrawn) for this
purpose.
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Must You
Withdraw or Use Assets?
You are not required to take distributions from your Roth
IRA at any age. The minimum distribution rules that apply to
traditional IRAs do not apply to Roth IRAs while the owner is
alive. However, after the death of a Roth IRA owner, certain
of the minimum distribution rules that apply to traditional
IRAs also apply to Roth IRAs.
Minimum distributions. You
cannot use your Roth IRA to satisfy minimum distribution
requirements for your traditional IRA. Nor can you use
distributions from traditional IRAs for required
distributions from Roth IRAs.
Recognizing Losses on
Investments
If you have a loss on your Roth IRA investment, you can
recognize the loss on your income tax return, but only
when all the amounts in all of your Roth IRA accounts have
been distributed to you and the total distributions are
less than your unrecovered basis. Your basis is the total
amount of contributions in your Roth IRAs. You claim the
loss as a miscellaneous itemized deduction, subject to the
2%-of-adjusted-gross-income limit that applies to certain
miscellaneous itemized deductions on Schedule A, Form
1040.
Distributions After Owner's
Death
If a Roth IRA owner dies, the minimum distribution
rules that apply to traditional IRAs apply to Roth IRAs as
though the Roth IRA owner died before his or her required
beginning date.
Distributions to beneficiaries.
Generally, the entire interest in the Roth IRA must be
distributed by the end of the fifth calendar year after
the year of the owner's death unless the interest is
payable to a designated beneficiary over the life or
life expectancy of the designated beneficiary.
If paid as an annuity, 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.
If the sole beneficiary is the spouse, he or she
can either delay distributions until the decedent would
have reached age 70½, or treat the Roth IRA as his or
her own.
Combining with other Roth IRAs.
A beneficiary can combine an inherited Roth IRA with
another Roth IRA maintained by the beneficiary only if
the beneficiary either:
| Inherited the other Roth IRA from the same
decedent, or |
| Was the spouse of the decedent and the sole
beneficiary of the Roth IRA and elects to treat it
as his or her own IRA. |
Distributions that are not qualified distributions.
If a distribution to a beneficiary is not a qualified
distribution, it is generally includible in the
beneficiary's gross income in the same manner as it
would have been included in the owner's income had it
been distributed to the IRA owner when he or she was
alive.
If the owner of a Roth IRA dies before the end of:
| The 5-year period beginning with the first
taxable year for which a contribution was made to a
Roth IRA set up for the owner's benefit, or
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| The 5-year period starting with the year of a
conversion contribution from a traditional IRA to a
Roth IRA, |
each type of contribution is divided among multiple
beneficiaries according to the pro-rata share of each.
Tax on excess accumulations
(insufficient distributions). If distributions from an
inherited Roth IRA are less than the required minimum
distribution for the year,
(Required Minimum Distributions), you may have
to pay a 50% excise tax for that year on the amount not
distributed as required.
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