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Roth IRAs

What is a Roth IRA?
Who is eligible to contribute to a Roth IRA?
I am an active participant in an employer-sponsored retirement plan.  May I contribute to a Roth IRA?
Are interest and dividend earnings tax-deferred?
How much can I contribute to a Roth IRA?
Must I contribute the full amount each year?
When can I make withdrawals?
Can I make earlier withdrawals?
When are taxes paid on Roth IRAs?
Can a Traditional IRA be converted to a Roth IRA?
Can funds be rolled over from one Roth IRA to another Roth IRA?
If I contribute to a Roth IRA, will it affect the amount that I can contribute to my employer-sponsored retirement plan?
Can my Roth IRA be inherited?
What is the deadline for contributing to a Roth IRA?
 
Q What is a Roth IRA?
A A Roth IRA is a special savings plan authorized by the Federal government to help you accumulate funds for your retirement.  Contributions are non-deductible but all withdrawals, including earnings, are tax-free if the account has been open for five years and the account holder is 59.5 or older.

 

Q Who is eligible to contribute to a Roth IRA?
A Every individual who has earned income or received alimony may contribute.  Income from other sources such as investments or inheritances does not qualify.  The accounts are available to couples with a modified adjusted gross income of up to $150,000 and singles up to $95,000.  Contributions are phased out between $150,000 and $160,000 for couples and $95,000 to $110,000 for singles.

 

Q I am an active participant in an employer-sponsored retirement plan.  May I contribute to a Roth IRA?
A The fact that you participate in an employer-sponsored retirement plan does not exclude you from making a non-deductible contribution to a Roth IRA.
 
Q Are interest and dividend earnings tax-deferred?
A All the earnings you accumulate in your IRA remain tax-sheltered and if they remain in the account for a period of five successive tax years they can be withdrawn tax-free.  There are certain criteria that must be met to enjoy tax-free and penalty-free distributions.

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Q How much can I contribute to a Roth IRA?
A You can contribute all or part of compensation in years 2002-2004, up to:
  • Individual Taxpayer - $3,000
  • Married Taxpayer - $6,000 where both spouses have earned income (each spouse can contribute up to $3,000 each)
  • Spousal IRA - $6,000 for married taxpayers filing jointly (yearly contributions may be divided between the accounts, provided the total contribution does not exceed $6,000 and neither account is allocated more than $3,000)

Total yearly contribution that can be made by an individual to all IRAs, Traditional (deductible, nondeductible) and Roth IRAs, is $3,000 not counting rollover contributions.

To make up for lost time, workers 50 and older before the end of the taxable year can make additional contributions above the new maximum limits as follows:

  • $500 a year (years 2002-2005)
  • $1,000 a year (year 2006 and thereafter)

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Q Must I contribute the full amount each year?
A No.  You can contribute any amount your budget allows, either in one or more contributions.  In fact, if you choose, you need not make any contributions in a given year.

 

Q When can I make withdrawals?
A Penalty-free and tax-free withdrawals of your contributions are permitted at any time (until total distributions from all Roth IRAs exceed the contribution amount - no distribution is subject to either taxation or penalty).  Tax-free withdrawals of earnings are permitted after age 59.5, in the event of death or total disability, or as a qualified first-time home buyer (up to $10,000).  In order to be tax-free they must have remained in the account for a period of five successive tax years.  There is no mandatory age requirement for distributions and funds may remain in the account during the account owner's lifetime.

 

Q Can I make earlier withdrawals?
A There could be  a 10% penalty for withdrawing all or any part of the earnings.  Taxable distributions are not subject to the 10% early withdrawal penalty if the individual is 59.5, dead, disable, or if taking equal period payments over his or her life expectancy for at least five years or until age 59.5, whichever comes later, or for college expenses, first-time home purchase up to $10,000, certain medical expenses, and certain other uses.

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Q When are taxes paid on Roth IRAs?
A Taxes are never paid on the original contributions which are not tax deductible in the year of your contribution.  Taxes must be paid on all withdrawal of earnings which have not remained for a period of five successive tax years.  (For example, if a taxpayer's first contribution is made for tax year 2001, 2001 is the first taxable year, and 2005 is the fifth taxable year.)

 

Q Can a Traditional IRA be converted to a Roth IRA?
A Yes, a Traditional IRA can be converted to a Roth if your adjusted gross income in the year of conversion is under $100,000 (same for both single filers and married couples who file jointly).  Married taxpayers who file separately are not eligible for a Roth conversion.

 

Q Can funds be rolled over from one Roth IRA to another Roth IRA?
A Yes, you may transfer or rollover from one Roth IRA to another Roth IRA tax-free and regardless of your adjusted gross income.

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Q If I contribute to a Roth IRA, will it affect the amount that I can contribute to my employer-sponsored retirement plan?
A No.  The amount you contribute to your employer-sponsored plan will not be affected by your Roth IRA contribution.

 

Q Can my Roth IRA be inherited?
A Yes.  When you die, the entire proceeds can be passed on tax-free to your beneficiaries, providing your Roth IRA meets the five-year test.

 

Q What is the deadline for contributing to a Roth IRA?
A You can open or make contributions to your Roth IRA any time up to and including the due date of your tax return for the previous tax year, normally April 15th.

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