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Roth IRAs

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Is saving for retirement important?

Ensuring financial security in retirement is one of the greatest challenges facing American workers today. Concern regarding the long term viability of Social Security continues to grow, and Americans are looking for new ways to secure their financial future. The following trends show the importance of saving for retirement.

  • Individuals are changing jobs more frequently, which might reduce their chance of acquiring great reserves in company pension plans.
  • Many new entrepreneurs striking out on their own cannot offer retirement options for themselves or to their employees until the company is more financially secure.
  • Social Security is no longer seen as the answer to retirement funding.

Individuals need to take responsibility to build their retirement nest egg. The Roth IRA allows individuals to invest after-tax dollars today, and let the assets grow with the potential to distribute the principal and earnings tax- and penalty-free during retirement.

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What makes the Roth IRA unique?

Imagine for a moment that an individual has just received a check. She looks at her summary and notices that federal income taxes were not withheld. Her initial reaction is that something is wrong—it's not—if this check is from her Roth IRA.

Two factors make this possible:

  • First, the money an individual contributes to a Roth IRA has already been taxed (individuals cannot take a tax deduction for their Roth IRA contributions). So the principal amount is never subject to future taxes or penalties as long as individuals stay within the contribution guidelines.
  • Second, the Roth IRA allows contributions to grow tax-deferred. If an individual does not distribute any of the earnings until he has had the Roth IRA for at least five years and has a qualifying event (generally turning 59½ years of age), those tax-deferred earnings are tax-free.
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Who is eligible to contribute to a Roth IRA?

Unlike the Traditional IRA, there is no 70½ limit on making contributions. But individuals must have eligible compensation, which is defined the same as for Traditional IRAs. As long as an individual satisfies the Roth IRA requirements, she may contribute to a Roth IRA, even after the year in which she attains age 70½.

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How much can I contribute?

The annual regular contribution limit is the lesser of $5,500 for 2013 and for 2014 (plus catch-up contributions, if eligible) or 100 percent of eligible compensation (generally earned income). IRA owners age 50 or older by the end of the tax year may increase their IRA contributions to help "catch-up" on their retirement savings, for a maximum contribution of $6,500 for 2013 and for 2014. The contribution limit applies to all Traditional and Roth IRA contributions made for the year, in aggregate.

Roth IRA contribution eligibility depends on the individual’s (or if married, the individual and the spouse’s) modified adjusted gross income (MAGI) and income tax filing status. The amount that an individual is eligible to contribute is reduced if his MAGI falls within or below certain phase-out ranges.

The 2013 and 2014 MAGI phase-out ranges are listed below.

Filing Status 2013 MAGI 2014 MAGI
Single $112,000-$127,000 $114,000-$129,000
Married, filing joint $178,000-$188,000 $181,000-$191,000
Married, filing separate $0-$10,000 $0-$10,000

The following specific details for Roth IRA contributions are based on 2014 figures.

  • Single individuals with MAGI of $114,000 or less may contribute the maximum annual contribution ($5,500, plus catch-up contributions, if eligible) to their Roth IRAs.
  • Single individuals with MAGI of more than $114,000 and less than $129,000 may make partial contributions to their Roth IRAs.
  • Single individuals with MAGI of $129,000 or more may not contribute to Roth IRAs.
  • Married individuals who file joint income tax returns with joint MAGI of $181,000 or less may contribute the maximum annual contribution to their Roth IRAs.
  • Married individuals who file joint returns with joint MAGI of more than $181,000 and less than $191,000 may make partial contributions to their Roth IRAs.
  • Married individuals who file joint returns with MAGI of $191,000 or more may not contribute to Roth IRAs for that year.
  • Married individuals who file separate returns with MAGI of less than $10,000 may make partial contributions to their Roth IRAs.
  • Married individuals who file separate returns with MAGI of $10,000 or more may not contribute to Roth IRAs.
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What is the contribution deadline?

Individuals must make regular contributions to Traditional and Roth IRAs by the due date of their federal income tax returns (generally April 15), not including extensions. If the deadline for filing an individual’s income tax return falls on a Saturday, Sunday, or legal holiday, he will have until the following business day to make his contribution.

Contributions made between January 1 and April 15 of one year for the previous year are called prior-year contributions.

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What is a qualified Roth IRA distribution?

Individuals may take a qualified Roth IRA distribution tax- and penalty-free. A distribution of Roth IRA assets is considered a qualified distribution if two requirements are met. First, the Roth IRA must satisfy a five-year waiting period, beginning with the first day of the year for which the Roth IRA owner makes a regular contribution or, if earlier, in which the Roth IRA owner completes a conversion or retirement plan rollover. Second, the distribution must be made because of one of the following events.

  • Age 59½
  • Death
  • Disability
  • First time home buyer

Distributions that meet the above requirements are referred to as "qualified distributions." While individuals may take distributions from their Roth IRAs at any time, distributions that are not qualified distributions may be subject to taxes (and in some cases the 10 percent early distribution penalty tax).

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Can I move assets from my Traditional IRA to my Roth IRA?

Yes. An individual may convert assets from a Traditional IRA to a Roth IRA. The individual must pay tax on any previously untaxed dollars converted from the Traditional IRA, but the 10 percent early distribution penalty tax does not apply to the conversion amount. Individuals should seek advice from a competent tax advisor to determine whether converting pretax retirement assets is beneficial.

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Am I ever required to take funds from my Roth IRA?

Unlike Traditional IRAs, there are no required minimum distributions due upon attaining age 70½. Earnings can continue to grow tax-deferred until the Roth IRA owner takes a distribution. There are special distribution requirements, however, after the IRA owner dies.