The Roth IRA – Individual Retirement Account – IRA

The Roth IRA has the same general requirements as the Traditional IRA I that the taxpayer must have taxable contribution in order to make a contribution. However there are differences between the two different kinds of accounts. Unlike a traditional IRA, the taxpayer can continue to contribute after  reaching the age of 70 and ½ and is never required to take a distribution. All the money put into a Roth IRA is non-deductible (this means that is composed of after tax dollars). Another difference is that when the money is withdrawn (providing all the qualifications are met) the distributions are tax free. This attribute creates a big advantage to those taxpayers who may not need the retirement money and wish to pass holdings to their heirs tax-free. The accounts can be inherited and are not subject to tax when the inheritor makes the withdrawals.

Contributions Limits

The Roth IRA as the following contribution limits which are similar to a traditional Ira

The lesser of

• $5,500 ($6,500 if age 50 or older) for 2016
• The taxpayers taxable compensation.

If the taxpayer decides that he would like to contribute to a Roth IRA and a Traditional Ira his or her contributions cannot exceed the contribution limits and any excess contributions could result in a penalty.

Qualified Distributions (Roth IRA)

Qualified distributions are distributions received by the taxpayer from the Roth IRA where the taxpayer has met certain conditions. Also if the distributions are part of the taxpayers regular contributions these are also tax free.  As a consequence of this non-taxable distributions will not be included in the taxpayers gross income.

A qualified is a payment or distribution from a Roth IRA that meets the following requirements.

1. It is made after the 5 taxable year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the taxpayers benefit, and
2. The payment or distribution is:
1. Made on or after the date he reaches age 59 and ½.
2. Made because the taxpayer is disabled.
3. Made to a beneficiary or to the taxpayers estate after his death; or
4. To pay certain qualified first-time homebuyer amounts. This can be up to $10,000 (thisis the lifetime limit) in acquisition costs for a principal residence of a “first time homebuyer.” A first time home buyer can be the taxpayer, his spouse, his child, or a grandchild or descendant of the taxpayer or spouse who has not owned a home within 2 years.

When filing taxes

When filing taxes with a Roth IRA, in some cases your Adjusted Gross Income (AGI) will need to be modified. Modified AGI for a Roth IRA is when the taxpayers AGI which is listed on Form 1040 is modified as follows.

The following are subtracted

1. A. Roth Ira conversions which are included on form 1040, line 15b , Form 1040A, line 11b
2. Roth Ira rollovers from qualified retirement plans are included on Form 1040, line 16b, form 1040A, line 12b

The following deductions and exclusions are added

1. Domestic production activities deduction.
2. Exclusion of employer paid adoption expenses shown on Form 8839.
3. Exclusion of qualified bond interest shown on Form 8815 and
4. Foreign earned income exclusion.
5. Foreign housing exclusion or deduction.
6. Student loan interest deduction
7. Traditional IRA deduction
8. Tuition and fees deduction

Taxpayers can also use the following methods to convert his traditional IRA to a Roth IRA. The following is a summary of the three methods of conversion.

1. Rollover – The taxpayer can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
2. Trustee to Trustee transfer – In this case the taxpayer can instruct the trustee of the traditional IRA to transfer an amount from the traditional Ira to the trustee of the Roth IRA.
3. Same trustee transfer – In this case the trustee of the traditional IRA also maintains the Roth Ira, and the taxpayer directs the trustee to transfer an amount from the traditional Ira to the Roth Ira.

Therefore if the taxpayer is making the conversion with the same trustee,  the process is more efficient as the traditional IRA is redesignated as a Roth Ira and a new account is not necessary.  The form 8606 is used to convert a traditional, SEP, or SIMPLE  IRA to a Roth IRA.