Roth IRA
Income limits
Annual contributions cannot exceed an individual’s annual compensation. Depending on their tax-filing status and modified adjusted gross income (MAGI), IRA owners may be eligible to make the full contribution, a partial contribution or no contribution.
| Tax-filing status | Full contribution | Partial contribution | Not eligible |
|---|---|---|---|
| 2009 MAGI | |||
| Single | $105,000 or less | $105,001–$119,999 | $120,000 or more |
| Joint | $166,000 or less | $166,001–$175,999 | $176,000 or more |
| Married, filing separately | not eligible | $0–$9,999 | $10,000 or more |
| 2010 MAGI | |||
| Single | $105,000 or less | $105,001–$119,999 | $120,000 or more |
| Joint | $167,000 or less | $167,001–$176,999 | $177,000 or more |
| Married, filing separately | not eligible | $0–$9,999 | $10,000 or more |
Annual contributions
Contributions are made with after-tax dollars. Catch-up contributions can be made in addition to the annual contribution by anyone age 50 or older who meets the income requirements.
| Year | Annual contribution | Additional catch-up contribution |
|---|---|---|
| 2009 | $5,000 | $1,000 |
| 2010 | $5,000 | $1,000 |
Contribution deadline
Contributions for the current tax year must be made by April 15 of the following year, unless April 15 falls on a Saturday or Sunday.
Nonrefundable tax credits
Eligible taxpayers can claim a nonrefundable tax credit for IRA contributions.
- In 2009 and 2010, the maximum credit allowed is no more than $2,000 and joint filers with a MAGI of $55,500 or less, heads of household with a MAGI of $41,625 or less and single filers with a MAGI of $27,700 or less qualify.
Creditor protection
- Contributory IRA assets are protected from creditors up to $1 million. Contributory assets above $1 million are subject to state law regarding creditor protection.
- Rollover IRA assets that came from employer-sponsored retirement plans (401(k), 403(b), 457, profit-sharing, money purchase, SIMPLE and SEP IRAs) enjoy unlimited protection regardless of the amount and are not subject to state law regarding creditor protection.
Earnings
Roth IRA earnings grow tax-free. (Taxes and possible penalties apply to earnings taken in nonqualified distributions.)
Distributions
Qualified distributions, including distributions on earnings, are tax-free. Distributions are qualified if they take place at least five years after the initial contribution or latest conversion and at least one of the following applies:
- the investor is at least age 59-1/2
- death
- disability
- first-home purchase ($10,000 lifetime limit)
Nonqualified distributions may be subject to taxes and possible penalties. Nonqualified distributions are taken in the following order:
- from contributions to the Roth until used up
- from conversions to the Roth (on a first-in, first-out basis when there is more than one conversion), each depleted in the following order:
- deductible contributions and earnings
- nondeductible contributions
- from earnings
- There are no required minimum distributions before death.
- When withdrawing amounts that are part of a conversion, the taxable portion of the converted amounts is treated as income. Penalties may be applied if the converted amounts are withdrawn within five years of the latest conversion.
Converting from a traditional IRA
- Assets in a traditional IRA may be converted to a Roth IRA if an investor’s MAGI for that year is $100,000 or less (married or single).
- Required minimum distributions (RMDs) from the traditional IRA are not considered part of the MAGI. Investors 70-1/2 and older who are subject to RMDs from their traditional IRA may be able to convert to a Roth and avoid future distributions. Keep in mind that RMDs taken from the traditional IRA in the year of conversion are not eligible to be converted. Additionally, all conversion amounts are subject to taxation in the year of conversion.
- A married person filing a separate return cannot convert a traditional IRA to a Roth IRA.
- The taxable portion of the converted amount will be treated as taxable income.
- Future contributions can be made to the new Roth IRA.
- A conversion must be initiated by December 31 of a given year to be considered a conversion for that taxable period.
Note: Income limit for conversion has been waived for 2010. Call us if you would like us to help you determine if this is a viable option for you.
Undoing (recharacterizing) a Roth IRA conversion
- A Roth conversion can be undone (recharacterized) for any reason, including if an investor’s income for the tax year in which he or she converted exceeds the $100,000 MAGI limit.
- Investors have until their tax filing deadlines (including extensions) of the year they converted to a Roth IRA to undo their conversions.
- If the converted amount (plus earnings) is returned to a traditional IRA, the IRS treats the original conversion as though it never happened.
Reconversion
Traditional IRA owners who want to reconvert to a Roth IRA must wait until the beginning of the new tax year following the tax year in which they converted, or a minimum of 30 days after the recharacterization is completed, whichever is later.
The above information is general in nature and is not intended as legal or tax advice. Along with our help, you should seek the advice of your tax consultant and/or attorney.