Q | | How do I open a Roth IRA? |
A. | | Complete the Roth IRA application and return to the Credit Union. |
Q. |
| What is a Roth IRA? |
A. | | A Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for former Senate Finance Committee Chairman William Roth, Jr., this IRA offers more incentives to boost your retirement savings, as well as more ways to use your nest egg. |
Q. |
| How does a Roth IRA work? |
A. | | Unlike traditional IRAs, contributions to a Roth IRA are never tax-deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to the plan provisions to get this tax-free advantage. |
Q. |
| Am I eligible to contribute to a Roth IRA? |
A. | | You are eligible if you earn compensation and your income is less than limits set by Congress. A single filer who has modified adjusted gross income (MAGI) up to $95,000 can make the full Roth IRA contribution for that year. Each spouse filing a joint federal income tax return showing a MAGI up to $150,000 can make the full Roth IRA contribution for that year. Some people with higher MAGI may be able to make smaller contributions. |
Q. | | How much is the full Roth IRA contribution? |
A. | | The amount of a full Roth IRA contribution varies. If you meet the eligibility tests described previously and you are under age 50, you can contribute up to $4,000 for 2005 through 2007. For owners age 50 and older, your limits increase to $4,500 for 2005, and $5,000 for 2006 and 2007. |
Q. | | What happens if my (our) income is too high to make a full contribution to a Roth IRA? |
A. | | A smaller contribution can be made if your MAGI is between $95,000 and $110,000 for single filers, and between $150,000 and $160,000 for joint filers. When income exceeds $110,000 for single filers and $160,000 for joint filers, a regular Roth IRA contribution cannot be made for that year. |
Q. | | Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan? |
A. | | Yes, and you can contribute past age 70 ˝ as long as you continue to earn compensation. |
Q. | | Can I have both a traditional and a Roth IRA? |
A. | | Yes, you can maintain both types of IRAs at the same time. You can even make contributions to both types of IRAs in the same year. But your contributions to both Roth and traditional IRAs cannot exceed the maximum contribution limit for all IRAs. |
Q. | | When can I start taking tax-free distributions from my Roth IRA? |
A. | | You can withdraw most contributions without paying income tax at any time. Distributions are treated as first being attributable to your contributions until all of your contributions have been distributed. There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the “five-year test”. In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply: a. You are over age 59 ˝ b. Funds are going to your beneficiary upon your death c. You have become disabled d. You are using the funds for a first-time home purchase (lifetime limit is $10,000 per person) If you have made a conversion contribution, please read further for taxation issues regarding conversions |
Q. | | What if I make an early withdrawal from my Roth IRA and I am not age 59 ˝ or covered by any exceptions? |
A. | | Good news. If you make early withdrawals from a Roth IRA to which you have made only regular contributions within the maximum annual limits, the amounts are considered to come from your already-taxed contributions first, with no additional taxes or penalties due. When you begin to withdraw earnings from this account, this money will be subject to ordinary income taxes, plus an additional ten percent early distribution tax. |
Q. | | Can I convert my existing traditional IRA to a Roth IRA? |
A. | | Yes. You can convert your traditional IRA to a Roth IRA if your MAGI in the year of the conversion is under $100,000. This limit is the same for both single filers and married couples who file jointly. Married taxpayers who file separately are not eligible for a Roth conversion. Use care and be sure to get all the facts. This is a complicated decision. |
Q. | | If I convert a traditional IRA to a Roth IRA, do I owe any taxes? |
A. | | Yes. Upon conversion, you will owe ordinary income taxes on your investment earnings and on deductible contributions you have made to your traditional IRA. This amount is taxable income in the year the money leaves the traditional IRA. Basically, you owe tax on any money that has not been taxed before. But you will have the opportunity to withdraw earnings made after the conversion, free of any taxes. |
Q. | | What about penalties on conversions from traditional IRAs to Roth IRAs? |
A. | | The ten percent early withdrawal penalty is waived on IRA conversions. |
Q. | | How will I know if I am a good candidate to convert my traditional IRA to a Roth IRA? |
A. | | The desirability will differ with each individual’s financial circumstances. Certainly, you should weigh the potential tax savings during retirement against the cost of your tax bill for the conversion. Because this decision is a complicated one, you should consult a tax professional. Consider several key questions: a. Would most of the funds in your traditional IRA be subject to income tax in the conversion? b. Can you afford to pay the income taxes due on the conversion from funds outside of your IRA funds? c. What tax bracket are you in now, and what tax bracket do you think you will be in when you retire? d. How long is it before you retire? e. Will the taxable income from the conversion bump you into a higher tax bracket? f. How will the income from the conversion affect the taxation of any Social Security retirement benefits you receive? g. Is the Roth IRA useful to you as an estate planning tool? |
Not intended as tax advice. Please consult a tax professional. |
