Have questions about Roth IRA? We have answers.

A Roth IRA is an Individual Retirement Account (IRA) that allows one to make tax-free withdrawals in retirement. While one does not get any immediate tax benefits, contributions and earnings grow tax-free which can be withdrawn tax and penalty-free once one reaches 59¹⁄₂ years of age, and if the account has been open for five years. Incorporating a Roth IRA into an overall investment plan is beneficial, since the account offers many ways to maximize retirement savings and minimizes taxes.

1. Check Eligibility: Make sure one is eligible to open a Roth IRA based on one’s earned yearly income. For example, a single filing taxpayer earning over $139,000 a year may not be eligible under the current year income limitations. Check with the IRS for income limitations.

2. Choose a Financial Institution: Find a financial institution to open a Roth IRA account.

3. Fill out the required paperwork: Fill out the paperwork for the Roth IRA within the chosen financial institution. Many times this step can be done completely online or through a customer service agent within a chosen financial institution.

4. Invest money: Decide how money is invested within a Roth IRA. Choose investment options or find a financial advisor to assist when making investment decisions.

5. Contribute to a Roth IRA: A contribution schedule can be made with a bank or financial institution of one’s choice to have contributions automatically deducted from a chosen bank account, and added to a Roth IRA. Contributions can be made up until the tax-filing date in the following year, typically April 15.

The rules for withdrawal from a Roth IRA account are different for contributions and earnings. Contributions are the monies deposited directly into the account, while earnings are the profits that have accumulated in an account through investments. Both contributions and earnings grow tax-free within an account over time.

Withdrawal rules for contributions:

1. Penalty-free and tax-free withdrawals may be made if the account is 5 years old and the account holder is 59¹⁄₂ years old.

2. Contributions may be withdrawn from a Roth IRA account at any time. Contributions are made with after-tax dollars, so there are no taxes or penalties for withdrawing them.

Withdrawal rules for earnings:

3. Earnings or profits from a Roth IRA, may be withdrawn with a 10% penalty and normal federal income taxes, depending on the age of the account and account holder.

EXCEPTIONS:

4. Penalty and tax-free withdrawals may be made from a Roth IRA, after 5 years of opening a Roth IRA account and if the owner of the account is younger than 59¹⁄₂, through Qualified Distributions. Some examples of Qualified Distributions defined by the IRS are:

• First time home purchases up to $10,000
• Rolled over IRA’s (if the IRA is rolled over correctly)
• During a divorce: Under a domestic relations order, distributions may be considered qualified
• Qualified higher education expenses
• Health insurance premiums, if unemployed for more than 12 consecutive weeks
• Substantially equal payments made in a series
• The account holder becomes disabled
• Unreimbursed medical expenses that are over 7.5% of (AGI) adjusted gross income
• The account owner dies
• Birth of a child expenses/adoption expenses

Money can be withdrawn anytime from a Roth IRA account for any reason without penalties and taxes as long as they are the contributions, which are after-tax dollars, so taxes have already been paid. However, earnings (profit) made from the account, have different rules that apply when withdrawing. Withdrawing from earnings on a Roth IRA account, before the account holder is 59¹⁄₂ and/or if the account is less than 5 years old, may accrue a 10% penalty and federal taxes.

Yes, a Roth IRA does earn interest; however, the way it earns interest is different from the way interest is earned with a savings account in a bank. Interest in a Roth IRA account is earned through the investments chosen in a Roth IRA account and will earn tax-free interest as long as the account is open.

A Roth IRA is different from a Traditional IRA in 4 main ways:

1. Tax Breaks: Contributions to a Roth IRA are after-tax dollars, while contributions to a Traditional IRA are mainly tax deferred till the time of eligible withdrawal, i.e., after 59¹⁄₂ of age.
2. Withdrawals: Roth IRA withdrawals may be penalty and tax free once one reaches 59¹⁄₂ and if the account has been open for more than 5 years.
3. Suitability: A Roth IRA is suitable for those individuals that expect to be in a higher tax bracket post 59¹⁄₂ years of age while a Traditional IRA may be beneficial to those that expect to be in a lower tax bracket post retirement.
4. Mandatory Distributions: There are no mandatory distributions (a specific amount one must withdraw) for a Roth IRA, but for a traditional IRA there are mandatory distributions after age 72.

1. First, open a Traditional IRA account and fund it.
2. Pay the necessary income taxes on your IRA contributions and gains.
3. Convert the account to a Roth IRA. A new Roth IRA account will have to be opened if one does not already exist.

Consult a financial advisor on the best ways to convert a Traditional IRA to a Roth IRA. Talking to a financial advisor will help determine the advantages and disadvantages of converting Traditional IRAs into Roth IRAs based on one’s specific needs and financial goals.

Yes, anyone who has a Traditional IRA account can convert their eligible IRA assets into a Roth IRA, regardless of income, tax rate and marital status.

It is difficult to gauge how much money an individual should convert from a Traditional IRA to a Roth IRA because everyone’s situation is different. It depends on each one’s retirement plans and financial goals.

However, remember that one will have to pay taxes on whatever amount of money they do convert from a Traditional IRA to a Roth IRA. If paying taxes on a conversion from a Traditional IRA to a Roth IRA one may save more money in their retirement account using non retirement monies to pay taxes.

For more information on specific conversion rates and processes, please contact a financial advisor for more options.

• Old 401(k)
• Old 403(b)
• Old governmental 457(b)
• Traditional IRA
• Rollover IRA
• SEP IRA
• SIMPLE IRA
• SARSEP IRA

When converting a Traditional IRA into a ROTH IRA the amount that is being converted will be taxed as ordinary income and may put the account holder in a higher marginal federal income tax bracket. The total taxable amount is determined by whether the contributions to the IRA were deductible. Deductible contributions and any gains on them are taxed at their full current value—so if one’s Traditional IRA has only deductible contributions, they will pay tax on the full amount. Nondeductible contributions have a nontaxable portion, which will be calculated using cost basis on IRS Form 8606.

Yes, one can roll over an old 401(k) from a previous employer into a Roth IRA. It is highly advised that one contact a financial advisor to be guided through this process.

The 5 year rule for a Roth IRA is the waiting period that needs to be met before withdrawing earnings tax free. The 5 year rule starts on the first day of the tax year, i.e., when one’s first contribution to any Roth IRA account takes place, not necessarily the account one may be withdrawing from.

Yes, there are income restrictions. Contributions to a ROTH IRA may be limited based on one’s modified adjusted gross income (MAGI). Visit the IRS website to see the income restrictions or contact a financial advisor for more information.

No, there are no required minimum distributions. One doesn't have to withdraw any contributions if one doesn't want to, at any particular age.

Backdoor Roth IRAs are a conversion of Traditional IRAs into a Roth IRA. A backdoor Roth IRA is a legal, informal retirement savings strategy used by high income earners to get around the income and contribution limits sanctioned by the IRS. In a backdoor Roth IRA conversion, money is put in a Traditional IRA, the contributed funds are converted into a Roth IRA, and applicable taxes are then paid for.