Difference between revisions of "Roth IRA"

From Bogleheads
Jump to navigation Jump to search
(Added link.)
m (Add {{US}} reason code.)
(81 intermediate revisions by 12 users not shown)
Line 1: Line 1:
{{IRA Sidebar}}
+
{{US|reason=irrelevant}}
{{Back to Bogleheads Retirement Planning Start-Up Kit}}
+
An '''individual retirement arrangement''', or '''IRA''', is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA (Traditional IRA) and pay taxes when you withdraw from the IRA; or receive no tax deduction on your contributions (Roth IRA), with, subject to certain restrictions, no tax imposed on your distributions. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.
An '''individual retirement arrangement''', or '''IRA''', is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA (Traditional IRA) and pay taxes when you withdraw from the IRA; or receive no tax deduction on your contributions (Roth IRA), with, subject to certain restrictions, no tax imposed on your distributions. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.[See also [[Traditional_IRA|Traditional IRA]].]
+
 
 +
Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.<ref>{{cite web|title=Taxpayer Relief Act Of 1997--Conference Report|url=https://www.congress.gov/congressional-record/1997/7/31/senate-section/article/S8415-1|accessdate=09-Sep-17|date=31-July-1997}}</ref> As of year-end 2016, investors held $660 billion dollars in Roth IRAs, comprising an 8% share to total IRA assets. <ref>[https://www.ici.org/research/stats/retirement/ret_17_q2 spreadsheet Report: The U.S. Retirement Market, Second Quarter 2017]</ref><ref group="note"> Roth IRA assets 1997 - 2016 (in billions). Investment Company Institute [https://www.ici.org/research/stats/retirement/ret_17_q2 spreadsheet Report: The U.S. Retirement Market, Second Quarter 2017]
 +
 
 +
{| class="wikitable collapsible collapsed"
 +
|-
 +
! Year !!Assets !!Share
 +
|-
 +
| 1997||$0||0%
 +
|-
 +
| 1998|||$57||3%
 +
|-
 +
| 1999||$76||3%
 +
|-
 +
| 2000|||$78||3%
 +
|-
 +
| 2001||$79||3%
 +
|-
 +
| 2002||$78||3%
 +
|-
 +
| 2003||$106ᵉ||4%
 +
|-
 +
| 2004||$140||4%
 +
|-
 +
| 2005||$156||5%
 +
|-
 +
| 2006||$196||5%
 +
|-
 +
| 2007||$232||5%
 +
|-
 +
| 2008||$177||5%
 +
|-
 +
| 2009||$239||5%
 +
|-
 +
| 2010||$255||7%
 +
|-
 +
| 2011||$360||7%
 +
|-
 +
| 2012||$439||8%
 +
|-
 +
| 2013||$548||8%
 +
|-
 +
| 2014||$600||8%
 +
|-
 +
| 2015||$605ᵉ||8%
 +
|-
 +
| 2016||$660ᵉ||8%
 +
|}
 +
* Share is the percentage of total IRA assets.
 +
* Roth IRAs include contributory, conversion, and rollover Roth IRAs.
 +
*ᵉ Data are estimated.<br>
 +
Sources: Investment Company Institute, Internal Revenue Service Statistics of Income Division, and Government Accountability Office</ref>
  
 
==Types of IRAs==
 
==Types of IRAs==
 +
''See also: [[Traditional IRA]]''
  
There are two basic types of IRA's, [[Traditional_IRA|traditional]] and Roth. A review of the differences between the two account structures follows:
+
There are two basic types of IRA's, [[Traditional_IRA|traditional]] and Roth. The table below reviews some of the differences between the two account structures.
 +
<!------indented list as table------->
 +
{| style="margin:auto;  width=800px  border=".1px" cellpadding="2px" cellspacing="0px"  <!--- applies to table -->
 +
|+''' IRAs'''
 +
|- align="center" bgcolor="lightgray"                                      <!------ applies to row ----->
 +
! width="25%" |'''Traditional IRA'''
 +
! width="25%" | '''Roth IRA'''
  
'''Traditional IRA'''
+
<!--- formatting for the cells--->
* Contributions are tax-deductible (depending on income level).
+
|- valign="top" align="left" style="background:White; font-size: 92%;"
 +
|<!--- 1st column --->
 +
* Available to everyone with taxable compensation (although tax-deductibility depends on income level). <ref> See [[Non-deductible Traditional IRA]] </ref>
 
* Penalty free withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2. <ref> Penalty free withdrawals can also be made by instituting a defined series of Substantially Equal Periodic Payments from an IRA. See [[SEPP:Substantially Equal Periodic Payments]].</ref>
 
* Penalty free withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2. <ref> Penalty free withdrawals can also be made by instituting a defined series of Substantially Equal Periodic Payments from an IRA. See [[SEPP:Substantially Equal Periodic Payments]].</ref>
 
* Taxes are paid on earnings when withdrawn from the IRA.
 
* Taxes are paid on earnings when withdrawn from the IRA.
* Available to everyone with earned income (although tax-deductibility depends on income level). <ref> See [[Non-deductible Traditional IRA]] </ref>
 
 
* Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions).
 
* Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions).
 +
* Contributions made to a Traditional IRA qualify for the Retirement Savings Contributions Credit ([[Saver's credit|Saver's Credit]]) if you meet the filing and income requirements.<ref> [http://www.irs.gov/publications/p571/ch10.html Retirement Savings Contributions Credit (Saver's Credit)], Publication 571, IRS </ref>
  
'''Roth IRA'''
+
|<!--- 2nd column --->
* Contributions are not tax-deductible.
+
* Contributions may be made only by those having taxable compensation and making under a certain income; anyone can [[#Conversion to Roth IRA|convert]] a Traditional IRA to a Roth. Contributions are not tax-deductible.
 +
* Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions).
 +
* After Age 59 1/2, all earnings and principal are tax free (subject to some minimal conditions).
 
* There is no mandatory distribution age for the account owner, or in the case of a spousal rollover.
 
* There is no mandatory distribution age for the account owner, or in the case of a spousal rollover.
* All earnings and principal are tax free (subject to some minimal conditions).
+
* Contributions made to a Roth IRA qualify for the Retirement Savings Contributions Credit ([[Saver's credit|Saver's Credit]]) if you meet the filing and income requirements.<ref> [http://www.irs.gov/publications/p571/ch10.html Retirement Savings Contributions Credit (Saver's Credit)], Publication 571, IRS </ref>
* Contributions may be made only by those having earned income and making under a certain income; anyone can [[#Conversion to Roth IRA|convert]] a Traditional IRA to a Roth.
+
|}<noinclude>
* Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions).
+
 
 +
{{main|Roth versus Traditional}}
 +
As a general rule of thumb, the decision as to which IRA an investor elects to use is a function of expected present and future tax rates. Thus a Traditional IRA should be considered if the present marginal tax rate is expected to be higher than the future marginal rate at distribution; The Roth IRA should be considered if the present marginal tax rate is expected to be lower than the future marginal rate at distribution. If the outlook for tax rates is uncertain, one should consider diversifying contributions (or conversions) between the two account types. A Roth IRA may also be a strong candidate for consideration if the account is used as an estate planning tool. For the original account owner (and spousal inheritors) there are no required minimum distributions to deplete the account for subsequent beneficiaries. If one faces estate tax a Roth conversion can produce tax savings to the estate since the income tax paid on the conversion both reduces the estate and renders tax savings since the income tax rate is lower than the estate tax rate. <ref>Bruno, Maria A.,and Jaconetti, Colleen M., ''[https://vanguard.com/pdf/s619.pdf The IRA opportunity: To Roth or not to Roth?]'', Vanguard Research, (May, 2011).</ref>
  
 
==Contribution Eligibility and Limits==
 
==Contribution Eligibility and Limits==
  
Your ability to contribute to a Roth IRA is limited depending on your filing status and the level of your "modified adjusted gross income". These income limits change year to year due to inflation adjustment. You can find these income limits in [http://www.irs.gov/publications/p590/ch02.html IRS Publication 590: Roth IRAs]
+
Your ability to contribute to a Roth IRA is limited depending on your filing status and the level of your "modified adjusted gross income". These income limits change year to year due to inflation adjustment. You can find these income limits in [http://www.irs.gov/publications/p590a/ch02.html IRS Publication 590-A: Roth IRAs] Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your tax return modified as follows;
  
'''Modified AGI.''' Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your tax return modified as follows.
+
{| class="wikitable"
 
+
|+'''Modified AGI.'''  
1.Subtract the following:
+
|-
 +
|1.Subtract the following:
 
:*Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.         
 
:*Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.         
 
:*Minimum required distributions from IRAs, (for conversions only).
 
:*Minimum required distributions from IRAs, (for conversions only).
 
+
|-
 +
|
 
2. Add the following deductions and exclusions:
 
2. Add the following deductions and exclusions:
 
:*Traditional IRA deduction,
 
:*Traditional IRA deduction,
Line 40: Line 105:
 
:*Exclusion of qualified bond interest shown on Form 8815, and
 
:*Exclusion of qualified bond interest shown on Form 8815, and
 
:*Exclusion of employer-provided adoption benefits shown on Form 8839. <ref>[http://www.irs.gov/publications/p590/ch02.html IRS Publication 590: Roth IRAs]</ref>
 
:*Exclusion of employer-provided adoption benefits shown on Form 8839. <ref>[http://www.irs.gov/publications/p590/ch02.html IRS Publication 590: Roth IRAs]</ref>
 +
|}
  
 +
Income limits for Roth IRA contributions are as follows:
  
{| class=wikitable style="text-align:center"  width=300px
+
{| class="wikitable"
|+ '''''Roth IRA Contribution Limit''s'''
+
|+ ''''' Income Limits for Roth IRA Contributions (2010)''''' <ref>[https://www.irs.gov/newsroom/income-ranges-for-determining-ira-eligibility-change-for-2021 Income ranges for determining IRA eligibility change for 2021], IRS.</ref>
 +
|-
 +
! Individual/Filing Status !! Contribution Phase-Out Begins !! Contribution Phase-Out Ends
 +
|-
 +
| Single, or Married Filing Separately and not living with spouse || $125,000 || $140,000
 +
|-
 +
| Married Filing Jointly || $198,000 || $208,000
 +
|-
 +
| Married Filing Separately and living with spouse || $0 || $10,000
 +
|}
 +
 
 +
Contributions limits are reduced linearly within the phase-out range.
 +
 
 +
IRA contributions are also limited by the amount of your taxable compensation (nontaxable combat pay is also applicable for an IRA contribution).  The total amount you can contribute to your IRAs cannot be greater than the amount of your taxable compensation for the year of the contribution.  For married couples filing jointly, the taxable compensation of either spouse can be used to make the contributions to each person’s IRAs.  It makes no difference which spouse has the taxable compensation, but the total taxable compensation cannot be less than the total of the IRA contributions for both individuals.
 +
 
 +
The IRS defines taxable compensation as the taxable income and wages you get for working.  Either working for someone who pays you or working for a business you own.  If you are working for someone else, taxable compensation will be reported in Box 1 of your W-2.  If you are working for a business you own, your taxable compensation is the net income reported on the Schedule C less 50% of the self-employment taxes you pay.  Other types of income do not fit the definition of taxable compensation and cannot be used for Roth IRA contributions (except for commissions and taxable alimony and separate maintenance).
 +
 
 +
These contribution limits apply to the total you can contribute to all of your IRAs.  You cannot contribute the maximum amount to a traditional IRA and also make a contribution to a Roth IRA.  The contribution maximum can be divided between the IRAs in any way you wish but the total cannot exceed the limit. Beginning in 2009, contribution limits are inflation-adjusted in $500 increments. The table below provides the historical maximum annual Roth contribution limits.
 +
 
 +
{| class=wikitable style="text-align:center"  width=400px
 +
|+ '''''Roth IRA Contribution Limits'''
 
  !Year
 
  !Year
 
  !Age 49 and Below
 
  !Age 49 and Below
 
  !Age 50 and Above
 
  !Age 50 and Above
 
  |-
 
  |-
  |  1998
+
  |  1998 - 2001
|  $2,000
 
|  $2,000
 
|-
 
|  1999
 
| $2,000
 
|  $2,000
 
|-
 
|  2000
 
 
  |  $2,000
 
  |  $2,000
 
  |  $2,000
 
  |  $2,000
 
  |-
 
  |-
|  2001
+
  |  2002 - 2004
| $2,000
 
| $2,000
 
|-
 
  |  2002
 
| $3,000
 
| $3,500
 
|-
 
|  2003
 
| $3,000
 
| $3,500
 
|-
 
2004
 
 
  | $3,000
 
  | $3,000
 
  | $3,500
 
  | $3,500
Line 80: Line 147:
 
  | $4,500
 
  | $4,500
 
  |-
 
  |-
  |  2006
+
  |  2006 - 2007
 
  | $4,000
 
  | $4,000
 
  | $5,000
 
  | $5,000
 
  |-
 
  |-
  |  2007
+
  |  2008 - 2012
| $4,000
 
 
  | $5,000
 
  | $5,000
 +
| $6,000
 
  |-
 
  |-
  |  2008
+
  |  2013 - 2018
  | $5,000
+
  | $5,500
  | $6,000
+
  | $6,500
 
  |-
 
  |-
  |  2009
+
  |  2019 - 2021
| $5,000
 
 
  | $6,000
 
  | $6,000
 +
| $7,000
 
  |}
 
  |}
  
Beginning in 2009, contribution limits will be inflation-adjusted in $500 increments.
+
===Roth IRA for Children===
 +
{{Main article|Accounts for children}}
  
 
+
Parents sometimes wonder if it is okay to contribute to a Roth IRA for their children. As stated above, it is necessary to have taxable compensation in order to contribute to an IRA (Traditional or Roth). Children can obtain taxable compensation by working for a business or through self-employment (e.g. babysitting, mowing lawns, etc). Very young children have few options for legitimate work, but can perform acting or modeling. There are advantages for parents with businesses to hire their children in appropriate jobs, but need to be careful to avoid paying children for household chores through their business. Parents should be aware that a child who has self-employment income in excess of $400 must pay self-employment taxes.<ref> [https://www.irs.gov/pub/irs-utl/OC-Whateverystudentshouldknowaboutsummerjobsandtaxes.pdf What every student should know about summer jobs and taxes], IRS, accessed May 26, 2020.</ref> While there are proponents for parents paying their children for household chores and using that compensation as the basis for Roth IRA contributions, others, including the Tax Court, take a dim view of considering parents and children in an employer/employee relationship regarding household chores. <ref>[https://fairmark.com/retirement/roth-accounts/contributions-to-roth-accounts/roth-iras-for-minors/ Roth IRAs for Minors], Fairmark, Kaye A. Thomas, February 7, 2018, accessed May 25, 2020.</ref><ref>[https://www.courtlistener.com/pdf/2006/08/21/michael_d._and_christine_r._alexander_v._commissioner.pdf T.C. Summary Opinion 2006-127], United States Tax Court, accessed May 25, 2020.</ref>
'''Other Limitations on IRA Contributions.'''  These contribution limits apply to the total you can contribute to all of your IRAs.  You cannot contribute the maximum amount to a traditional IRA and also make a contribution to a Roth IRA. The contribution maximum can be divided between the IRAs in any way you wish but the total cannot exceed the limit.
 
 
 
IRA contributions are also limited by the amount of your earned income. The total amount you can contribute to your IRAs cannot be greater than the amount of your earned income for the year of the contribution. For married couples filing jointly, the earned income of either spouse can be used to make the contributions to each person’s IRAs.   It makes no difference which spouse has the earned income, but the total earned income cannot be less than the total of the IRA contributions for both individuals.
 
The IRS defines earned income as the taxable income and wages you get for working.  Either working for someone who pays you or working for a business you own. If you are working for someone else, earned income will be reported on line 3 of your W-2. If you are working for a business you own, your earned income is the net income reported on the Schedule C less 50% of the self-employment taxes you pay. Other types of income do not fit the definition of earned income and cannot be used for Roth IRA contributions.
 
  
 
==Conversion to Roth IRA==
 
==Conversion to Roth IRA==
 
+
{{Main|Roth IRA conversion}}
[[:Roth IRA conversion | '''Conversions''']] from a Traditional IRA to a Roth IRA require one to pay the tax due (without penalty tax) on any previously untaxed Traditional IRA assets converted.  For an analysis of the potential benefits of a conversion, see [[Roth IRA conversion]].  In general, conversions work best when one is in a low tax bracket and when the source of funds for paying the tax are available outside of the IRA. If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax.<ref> Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.247. ISBN 0-9649440-7-3</ref>
 
 
 
You can convert a Traditional IRA to a Roth IRA if:
 
 
 
* your Modified AGI (see above) does not exceed $100,000, and
 
* you are not married filing separately.
 
  
 
{{Quote
 
{{Quote
|quote    = See [http://www.vanguard.com/pdf/rpd21.pdf The rules for Roth conversions are changing in 2010]
+
|quote    = More on Conversions
 +
* [http://www.vanguard.com/pdf/rpd21.pdf The rules for Roth conversions are changing in 2010]
 +
* [http://www.fairmark.com/rothira/index.htm#conversions Fairmark's Roth IRA Guide: Conversions]
 
|source    =  
 
|source    =  
 
}}
 
}}
 +
{{Notice|Recharacterization of Roth IRA conversions made in 2018 or later are no longer permitted.}}
  
''New conversion rules for 2010:''<ref>[http://www.irs.gov/publications/p590/ch02.html#en_US_publink1000230961 IRS Publication 590 (2009), Individual Retirement Arrangements (IRAs)]</ref>
+
Roth IRA conversions from a Traditional IRA to a Roth IRA require one to pay the tax due (without an early withdrawal penalty) on any previously untaxed Traditional IRA assets converted. In general, conversions work best when one is in a low tax bracket and when the source of funds for paying the tax are available outside of the IRA. If the tax is paid out of the converted assets, the payment may be considered an early distribution and is subject to both income tax and, if one is under age 59 1/2, a 10 percent early withdrawal penalty. <ref> Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.247. ISBN 0-9649440-7-3</ref>
*Beginning in 2010, the modified AGI and filing status requirements for converting a traditional IRA to a Roth IRA are eliminated.
+
 
*For 2010 only, you may choose to pay taxes on conversion either all in 2010 or in equal amounts in 2011 and 2012.<ref>[http://www.irs.gov/publications/p590/ch02.html#en_US_publink1000230961 IRS Publication 590 (2009), Individual Retirement Arrangements (IRAs)] Applies for any 2010 rollover from an IRA, except from Roth IRA to Roth IRA.</ref>
+
Since new conversion rules were implemented in 2010 there have been no income limits or filing status requirements for converting a traditional IRA to a Roth IRA. In 2010 alone, investors were given the option of paying the taxes on the conversion either all in 2010 or in equal amounts in 2011 and 2012.<ref>[http://www.irs.gov/publications/p590/ch02.html#en_US_publink1000230961 IRS Publication 590 (2009), Individual Retirement Arrangements (IRAs)] Applies for any 2010 rollover from an IRA, except from Roth IRA to Roth IRA.</ref>. Investors whose incomes exceed the limits for allowing contributions to a Roth IRA should consider the option of contributing to a [[:Non-deductible Traditional IRA]] and executing a [[:Backdoor Roth IRA]].
  
 
For the tax consequences of taking a distribution of converted assets see [[#Distributions Roth IRA | Distributions]] below.
 
For the tax consequences of taking a distribution of converted assets see [[#Distributions Roth IRA | Distributions]] below.
  
For more complete information on conversions, refer to [http://www.fairmark.com/rothira/index.htm#conversions Fairmark's Roth IRA Guide: Conversions].
+
If one wishes to undo a conversion done in 2017 or earlier, one does so by executing an '''[[IRA recharacterization]]'''. Undoing a conversion might result from finding that:
 
+
*One is in a higher tax bracket than intended, possibly from increased income near the end of the year.
If one wishes to undo a conversion, one does so by executing an '''[[IRA recharacterization]]'''. Undoing a conversion might result from finding that:
 
*One has earned too much income during the year to qualify for a conversion.
 
 
*One finds that one does not have sufficient funds to pay the conversion tax.
 
*One finds that one does not have sufficient funds to pay the conversion tax.
*The market value of the converted assets has fallen in price after the conversion and one can save tax by recharacterizing the conversion and then, in accordance with IRS restrictions, reconverting the assets at the lower value.
+
*The market value of the converted assets has fallen in price after the conversion and one can save on taxes by recharacterizing the conversion and then, in accordance with IRS restrictions, reconverting the assets at the lower value.
  
For more complete information on recharacterizations, refer to [http://www.fairmark.com/rothira/index.htm#recharacterizations Fairmark's Roth IRA Guide: Roth Recharacterizations].
+
==Distributions==
  
==Distributions==
+
While a Roth IRA does not impose required minimal distributions for the original Roth IRA owner, or for a spouse who elects to treat an [[:Inheriting a Roth IRA |inherited Roth IRA]] as one's own in a spousal rollover, non-spousal inheritors are required to take required minimal distributions of the Roth over their life expectancies. 
  
{{Quote
+
In addition, there can be some tax consequences to taking distributions from a Roth IRA prior to age 59 1/2 or before the Roth has been held for a minimum of five years for both contributions as well as for each Roth conversion. There are specific ordering rules and tax consequences for Roth IRA distributions.<ref>[https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions], Michael Kitces, January 1, 2014, accessed 19 June 2020.</ref> Furthermore, there may be state-specific rules regarding non-qualified distributions.  For example, in New Jersey, non-qualified withdrawals from a Roth IRA are treated as proportional withdrawals of contributions and gains, so tax and penalty would be due on the gain portion.<ref>[https://www.bogleheads.org/forum/viewtopic.php?p=5388305#p5399667 Roth IRA Idea: Burst my bubble]</ref><ref>[https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git2.pdf IRA Withdrawals], New Jersey Tax Topic Bulletin GIT-2, accessed August 01, 2020</ref>
|quote    = '''Order of Distributions'''
 
  
 
The amounts you withdraw from a Roth IRA are considered to consist of the following amounts, in the following order. In each case, you move to the next category when the lifetime total of distributions from all your Roth IRAs exceed the preceding category.
 
The amounts you withdraw from a Roth IRA are considered to consist of the following amounts, in the following order. In each case, you move to the next category when the lifetime total of distributions from all your Roth IRAs exceed the preceding category.
  
*Regular contributions  
+
#Regular contributions  
*Taxable portion of first conversion  
+
#Taxable portion of first conversion (portion that was taxed at time of conversion)
*Nontaxable portion of first conversion  
+
#Nontaxable portion of first conversion  
*Each subsequent conversion, in order, with the taxable portion coming out first for each conversion  
+
#Each subsequent conversion, in order, with the taxable portion coming out first for each conversion  
*Earnings (any increase in value occurring inside the Roth IRA) <ref>[http://www.fairmark.com/rothira/distrib.htm Fairmark: Roth IRA Distribution Overview]</ref>
+
#Earnings (any increase in value occurring inside the Roth IRA) <ref name="Fairmark_Distribution">[http://www.fairmark.com/rothira/distrib.htm Fairmark: Roth IRA Distribution Overview], Kaye A. Thomas, February 11, 2018, Accessed 19 June 2020.</ref>
  
 
'''Treatment of Distributions'''
 
'''Treatment of Distributions'''
  
The tax treatment of the different categories of distributions may be summarized as follows:
+
The tax treatment of the different categories of distributions may be summarized as follows (In table form
*Regular Contributions can be withdrawn at any time with no tax and no penalty.
+
<ref group="note>'''Treatment of distributions''' summarised in table form, from information supplied by KAWill (Fairmark):
*Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.
 
**If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you're under age 59½ unless an exception applies. <ref>Exceptions to the early withdrawal penalty tax on converted assets include total disability, or death. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.248. ISBN 0-9649440-7-3</ref>  
 
**Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
 
**Special rules apply to withdrawals of amounts converted in 2010.
 
*Nontaxable Portion of Any Rollover
 
**Applies only after the taxable portion of the same conversion has been withdrawn.
 
**Can be withdrawn at any time with no tax and no penalty.
 
*Earnings
 
**Applies only after all amounts other than earnings have been withdrawn.
 
**If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
 
**Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you're over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty.  <ref>[http://www.fairmark.com/rothira/distrib.htm Fairmark: Roth IRA Distribution Overview]</ref>
 
 
 
|source    = -[http://www.fairmark.com/rothira/distrib.htm Fairmark: Roth IRA Distribution Overview]}}
 
 
 
While a Roth IRA does not impose required minimal distributions for the original Roth IRA owner, or for a spouse who elects to treat an inherited Roth IRA as one's own in a spousal rollover, non-spousal inheritors are required to take required minimal distributions of the Roth over their life expectancies. 
 
 
 
In addition, there can be some tax consequences to taking distributions from a Roth IRA prior to age 59 1/2 or before the Roth has been held for a minimum of five years for both contributions as well as for each Roth conversion. The specific ordering rules for Roth IRA distributions and the tax consequences of the distributions are discussed in the sidebar quote box, courtesy of [http://www.fairmark.com/index.htm Fairmark].
 
  
<br style="clear: both" />
+
{| class="wikitable collapsible" width=800px
 +
|-
 +
! rowspan="2" | Withdrawal
 +
! rowspan="2" | Treatment
 +
! colspan="2" | Under age 59.5
 +
! colspan="2" | Over age 59.5
 +
|-
 +
! Five year conversion holding period not met
 +
! Five year conversion holding period met
 +
! Less than five years since opening first Roth IRA
 +
! Five years or more since opening first Roth IRA
 +
|-
 +
| colspan="6" |
 +
|-
 +
! rowspan="2" | Contributions
 +
! Tax
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| rowspan="11" style="background:#9F9;vertical-align:middle;text-align:center;" | Qualified
 +
|-
 +
! Penalty
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
| colspan="5" |
 +
|-
 +
! rowspan="2" | Conversions, taxable portion
 +
! Tax
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
! Penalty
 +
| style="background:#F99;vertical-align:middle;text-align:center;" | Yes
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
| colspan="5" |
 +
|-
 +
! rowspan="2" | Conversions, nontaxable portion
 +
! Tax
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
! Penalty
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
| colspan="5" |
 +
|-
 +
! rowspan="2" | Earnings
 +
! Tax
 +
| style="background:#FFFF90;vertical-align:middle;text-align:center;" | Yes
 +
| style="background:#FFFF90;vertical-align:middle;text-align:center;" | Yes
 +
| style="background:#FFFF90;vertical-align:middle;text-align:center;" | Yes
 +
|-
 +
! Penalty
 +
| style="background:#F99;vertical-align:middle;text-align:center;" | Yes
 +
| style="background:#F99;vertical-align:middle;text-align:center;" | Yes
 +
| style="background:#9F9;vertical-align:middle;text-align:center;" | No
 +
|-
 +
|}</ref>):
 +
#Regular Contributions can be withdrawn at any time with no tax and no penalty.
 +
#Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.
 +
##If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you're under age 59½ unless an exception applies. <ref>Exceptions to the early withdrawal penalty tax on converted assets include total disability, or death. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.248. ISBN 0-9649440-7-3</ref>
 +
##Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
 +
##Special rules apply to withdrawals of amounts converted in 2010.
 +
#Nontaxable Portion of Any Rollover
 +
##Applies only after the taxable portion of the same conversion has been withdrawn.
 +
##Can be withdrawn at any time with no tax and no penalty.
 +
#Earnings
 +
##Applies only after all amounts other than earnings have been withdrawn.
 +
##If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
 +
##Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you're over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty.  <ref name="Fairmark_Distribution" />
  
==See Also==
+
==Notes==
[[:Roth IRA conversion]]
+
<references group="note"/>
  
 
==References==
 
==References==
<references/>
+
{{Reflist|30em}}
  
==External Links==
+
==External links==
*[http://www.irs.gov/publications/p590/ch02.html IRS Publication 590: Roth IRAs]
+
*[http://www.irs.gov/publications/p590a/ch02.html Publication 590-A Contributions to IRAs], Roth IRA, 2014. [http://www.irs.gov/pub/irs-pdf/p590a.pdf (PDF)]
 +
*[http://www.irs.gov/publications/p590b/ch02.html Publication 590-B, Distributions from IRAs], Roth IRA, 2014. [http://www.irs.gov/pub/irs-pdf/p590b.pdf (PDF)]
 +
*[http://www.irs.gov/publications/p590/ch02.html IRS Publication 590: Roth IRAs], 2013.  Superseded by 590-A and 590-B.
 
*[http://www.fairmark.com/rothira/index.htm Fairmark.com guide to Roth IRAs and related accounts]
 
*[http://www.fairmark.com/rothira/index.htm Fairmark.com guide to Roth IRAs and related accounts]
==Papers: Roth IRAs==
+
*[http://www.bogleheads.org/forum/viewtopic.php?f=10&t=86262 Backdoor Both -- have your cake and eat it too], forum discussion of a technique to bypass state taxes when converting a deductible Traditional IRA contribution to a Roth IRA. This is an advanced investing technique which only benefits investors who are making ''direct'' Roth contributions ''and'' paying state tax; typically Married Filing Jointly < $100,000.
*Keebler, Bob, and Bigge, Stephen, “To Convert or Not to Convert: That is the Question.”  ''CCH Journal of Retirement Planning'' ( (May-June 2007. Available at http://www.ataxplan.com/bulletinBoard/ira_conversions.cfm
 
* Reichenstein, William, "Tax-Efficient Sequencing Of Accounts to Tap in Retirement" TIAA-CREF Institute (October, 2006). Available at http://www.tiaa-crefinstitute.org/pdf/research/trends_issues/tr100106.pdf
 
  
==Papers: Roth 401-k and Roth 403-b Plans==
+
===Bibliography===
Ahern, Michael, Ameriks, John, Dickson, Joel, Nestor,Robert, Utkus Stephen, "Tax Diversification and the Roth 401(k)" Vanguard Center for Retirement Research (October, 2005. Available at https://institutional.vanguard.com/iip/pdf/CRR_Roth_401k.pdf
+
{| border="0"
* McQuarrie,Edward F. Ph.D., " Thinking About a Roth 401(k)? Think Again" Journal of Financial Planning, (July, 2008). Available at http://www.joetaxpayer.com/images/ThinkingAboutaRoth401(k).pdf
+
||'''White papers'''
* Reichenstein, William, Rothermich, Douglas, Waltenberger,Alicia, "The Expanding “Roth” Retirement Account" TIAA-CREF Institute (March, 2006). Available at http://www.tiaa-crefinstitute.org/pdf/research/trends_issues/tr030106.pdf
+
Bruno, Maria A.,and Jaconetti, Colleen M., ''[http://vanguard.com/pdf/s619.pdf The IRA opportunity: To Roth or not to Roth?]'', Vanguard Research, (May, 2011).
 +
*  Bruno, Maria A., and Shinn, Alissa M., ''[http://vanguard.com/pdf/s623.pdf Estate planning opportunities with Roth IRA conversions], Vanguard Research, (March, 2010).
 +
* Jaconetti, Colleen M., and Bruno, Maria A. ''[http://www.vanguard.com/pdf/icrsp.pdf Spending from a Portfolio: Implications of Withdrawal Order for Taxable Investors], Vanguard Research, (2008).
 +
* Reichenstein, William, ''[https://www.tiaainstitute.org/public/institute/research/trends_issues/ti_taxefficient_1006.html Tax-Efficient Sequencing Of Accounts to Tap in Retirement]'' TIAA-CREF Institute (October, 2006).  
  
{{Footer}}
+
'''Papers: Roth 401(k) and Roth 403(b) Plans'''
  
 +
*  Ahern, Michael, [[John Ameriks|Ameriks, John]], Dickson, Joel, Nestor,Robert, Utkus Stephen, ''[https://bridge.vanguard.com/brg/pdf/CRR_Roth_401k.pdf Tax Diversification and the Roth 401(k)]'', Vanguard Center for Retirement Research (October, 2005).
 +
*  Bruno, Maria A., Tyson, Wendy A., and Kilroy, John,''[https://personal.vanguard.com/pdf/icro4r.pdf In-plan Roth conversions: An overview]'', Vanguard Research, (January 3,2011).
 +
* Reichenstein, William, Rothermich, Douglas, Waltenberger, Alicia,'' [https://www.tiaainstitute.org/public/pdf/institute/research/trends_issues/tr030106.pdf The Expanding “Roth” Retirement Account]'', TIAA-CREF Institute (March, 2006).
 +
;Academic papers
 +
* Keebler, Bob, and Bigge, Stephen,''[https://www.ataxplan.com/bulletin-board/to-convert-or-not-to-convert-that-is-the-question/ To Convert or Not to Convert: That is the Question]'',  CCH Journal of Retirement Planning  (May-June 2007.
 +
|}
  
 +
{{Bogleheads retirement planning start-up kit}}
 +
{{Retirement accounts}}
 +
{{Managing your IRA}}
 
[[Category:IRAs]]
 
[[Category:IRAs]]
[[Category:Retirement Planning]]
+
[[Category:Pages requiring annual tax updates]]

Revision as of 06:21, 7 February 2021

Flag of the United States.svg.png This article contains details specific to United States (US) investors. It does not apply to non-US investors.

An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA (Traditional IRA) and pay taxes when you withdraw from the IRA; or receive no tax deduction on your contributions (Roth IRA), with, subject to certain restrictions, no tax imposed on your distributions. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

Named after US Senator William Roth, Roth IRAs were established by the Taxpayer Relief Act of 1997.[1] As of year-end 2016, investors held $660 billion dollars in Roth IRAs, comprising an 8% share to total IRA assets. [2][note 1]

Types of IRAs

See also: Traditional IRA

There are two basic types of IRA's, traditional and Roth. The table below reviews some of the differences between the two account structures.

IRAs
Traditional IRA Roth IRA
  • Available to everyone with taxable compensation (although tax-deductibility depends on income level). [3]
  • Penalty free withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2. [4]
  • Taxes are paid on earnings when withdrawn from the IRA.
  • Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions).
  • Contributions made to a Traditional IRA qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[5]
  • Contributions may be made only by those having taxable compensation and making under a certain income; anyone can convert a Traditional IRA to a Roth. Contributions are not tax-deductible.
  • Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions).
  • After Age 59 1/2, all earnings and principal are tax free (subject to some minimal conditions).
  • There is no mandatory distribution age for the account owner, or in the case of a spousal rollover.
  • Contributions made to a Roth IRA qualify for the Retirement Savings Contributions Credit (Saver's Credit) if you meet the filing and income requirements.[6]

As a general rule of thumb, the decision as to which IRA an investor elects to use is a function of expected present and future tax rates. Thus a Traditional IRA should be considered if the present marginal tax rate is expected to be higher than the future marginal rate at distribution; The Roth IRA should be considered if the present marginal tax rate is expected to be lower than the future marginal rate at distribution. If the outlook for tax rates is uncertain, one should consider diversifying contributions (or conversions) between the two account types. A Roth IRA may also be a strong candidate for consideration if the account is used as an estate planning tool. For the original account owner (and spousal inheritors) there are no required minimum distributions to deplete the account for subsequent beneficiaries. If one faces estate tax a Roth conversion can produce tax savings to the estate since the income tax paid on the conversion both reduces the estate and renders tax savings since the income tax rate is lower than the estate tax rate. [7]

Contribution Eligibility and Limits

Your ability to contribute to a Roth IRA is limited depending on your filing status and the level of your "modified adjusted gross income". These income limits change year to year due to inflation adjustment. You can find these income limits in IRS Publication 590-A: Roth IRAs Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your tax return modified as follows;

Modified AGI.
1.Subtract the following:
  • Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
  • Minimum required distributions from IRAs, (for conversions only).

2. Add the following deductions and exclusions:

  • Traditional IRA deduction,
  • Student loan interest deduction,
  • Tuition and fees deduction,
  • Domestic production activities deduction,
  • Foreign earned income exclusion,
  • Foreign housing exclusion or deduction,
  • Exclusion of qualified bond interest shown on Form 8815, and
  • Exclusion of employer-provided adoption benefits shown on Form 8839. [8]

Income limits for Roth IRA contributions are as follows:

Income Limits for Roth IRA Contributions (2010) [9]
Individual/Filing Status Contribution Phase-Out Begins Contribution Phase-Out Ends
Single, or Married Filing Separately and not living with spouse $125,000 $140,000
Married Filing Jointly $198,000 $208,000
Married Filing Separately and living with spouse $0 $10,000

Contributions limits are reduced linearly within the phase-out range.

IRA contributions are also limited by the amount of your taxable compensation (nontaxable combat pay is also applicable for an IRA contribution). The total amount you can contribute to your IRAs cannot be greater than the amount of your taxable compensation for the year of the contribution. For married couples filing jointly, the taxable compensation of either spouse can be used to make the contributions to each person’s IRAs. It makes no difference which spouse has the taxable compensation, but the total taxable compensation cannot be less than the total of the IRA contributions for both individuals.

The IRS defines taxable compensation as the taxable income and wages you get for working. Either working for someone who pays you or working for a business you own. If you are working for someone else, taxable compensation will be reported in Box 1 of your W-2. If you are working for a business you own, your taxable compensation is the net income reported on the Schedule C less 50% of the self-employment taxes you pay. Other types of income do not fit the definition of taxable compensation and cannot be used for Roth IRA contributions (except for commissions and taxable alimony and separate maintenance).

These contribution limits apply to the total you can contribute to all of your IRAs. You cannot contribute the maximum amount to a traditional IRA and also make a contribution to a Roth IRA. The contribution maximum can be divided between the IRAs in any way you wish but the total cannot exceed the limit. Beginning in 2009, contribution limits are inflation-adjusted in $500 increments. The table below provides the historical maximum annual Roth contribution limits.

Roth IRA Contribution Limits
Year Age 49 and Below Age 50 and Above
1998 - 2001 $2,000 $2,000
2002 - 2004 $3,000 $3,500
2005 $4,000 $4,500
2006 - 2007 $4,000 $5,000
2008 - 2012 $5,000 $6,000
2013 - 2018 $5,500 $6,500
2019 - 2021 $6,000 $7,000

Roth IRA for Children

Parents sometimes wonder if it is okay to contribute to a Roth IRA for their children. As stated above, it is necessary to have taxable compensation in order to contribute to an IRA (Traditional or Roth). Children can obtain taxable compensation by working for a business or through self-employment (e.g. babysitting, mowing lawns, etc). Very young children have few options for legitimate work, but can perform acting or modeling. There are advantages for parents with businesses to hire their children in appropriate jobs, but need to be careful to avoid paying children for household chores through their business. Parents should be aware that a child who has self-employment income in excess of $400 must pay self-employment taxes.[10] While there are proponents for parents paying their children for household chores and using that compensation as the basis for Roth IRA contributions, others, including the Tax Court, take a dim view of considering parents and children in an employer/employee relationship regarding household chores. [11][12]

Conversion to Roth IRA

More on Conversions

Roth IRA conversions from a Traditional IRA to a Roth IRA require one to pay the tax due (without an early withdrawal penalty) on any previously untaxed Traditional IRA assets converted. In general, conversions work best when one is in a low tax bracket and when the source of funds for paying the tax are available outside of the IRA. If the tax is paid out of the converted assets, the payment may be considered an early distribution and is subject to both income tax and, if one is under age 59 1/2, a 10 percent early withdrawal penalty. [13]

Since new conversion rules were implemented in 2010 there have been no income limits or filing status requirements for converting a traditional IRA to a Roth IRA. In 2010 alone, investors were given the option of paying the taxes on the conversion either all in 2010 or in equal amounts in 2011 and 2012.[14]. Investors whose incomes exceed the limits for allowing contributions to a Roth IRA should consider the option of contributing to a Non-deductible Traditional IRA and executing a Backdoor Roth IRA.

For the tax consequences of taking a distribution of converted assets see Distributions below.

If one wishes to undo a conversion done in 2017 or earlier, one does so by executing an IRA recharacterization. Undoing a conversion might result from finding that:

  • One is in a higher tax bracket than intended, possibly from increased income near the end of the year.
  • One finds that one does not have sufficient funds to pay the conversion tax.
  • The market value of the converted assets has fallen in price after the conversion and one can save on taxes by recharacterizing the conversion and then, in accordance with IRS restrictions, reconverting the assets at the lower value.

Distributions

While a Roth IRA does not impose required minimal distributions for the original Roth IRA owner, or for a spouse who elects to treat an inherited Roth IRA as one's own in a spousal rollover, non-spousal inheritors are required to take required minimal distributions of the Roth over their life expectancies.

In addition, there can be some tax consequences to taking distributions from a Roth IRA prior to age 59 1/2 or before the Roth has been held for a minimum of five years for both contributions as well as for each Roth conversion. There are specific ordering rules and tax consequences for Roth IRA distributions.[15] Furthermore, there may be state-specific rules regarding non-qualified distributions. For example, in New Jersey, non-qualified withdrawals from a Roth IRA are treated as proportional withdrawals of contributions and gains, so tax and penalty would be due on the gain portion.[16][17]

The amounts you withdraw from a Roth IRA are considered to consist of the following amounts, in the following order. In each case, you move to the next category when the lifetime total of distributions from all your Roth IRAs exceed the preceding category.

  1. Regular contributions
  2. Taxable portion of first conversion (portion that was taxed at time of conversion)
  3. Nontaxable portion of first conversion
  4. Each subsequent conversion, in order, with the taxable portion coming out first for each conversion
  5. Earnings (any increase in value occurring inside the Roth IRA) [18]

Treatment of Distributions

The tax treatment of the different categories of distributions may be summarized as follows (In table form [note 2]):

  1. Regular Contributions can be withdrawn at any time with no tax and no penalty.
  2. Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.
    1. If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you're under age 59½ unless an exception applies. [19]
    2. Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
    3. Special rules apply to withdrawals of amounts converted in 2010.
  3. Nontaxable Portion of Any Rollover
    1. Applies only after the taxable portion of the same conversion has been withdrawn.
    2. Can be withdrawn at any time with no tax and no penalty.
  4. Earnings
    1. Applies only after all amounts other than earnings have been withdrawn.
    2. If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
    3. Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you're over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty. [18]

Notes

  1. Roth IRA assets 1997 - 2016 (in billions). Investment Company Institute spreadsheet Report: The U.S. Retirement Market, Second Quarter 2017
    • Share is the percentage of total IRA assets.
    • Roth IRAs include contributory, conversion, and rollover Roth IRAs.
    • ᵉ Data are estimated.

    Sources: Investment Company Institute, Internal Revenue Service Statistics of Income Division, and Government Accountability Office

  2. Treatment of distributions summarised in table form, from information supplied by KAWill (Fairmark):
    Withdrawal Treatment Under age 59.5 Over age 59.5
    Five year conversion holding period not met Five year conversion holding period met Less than five years since opening first Roth IRA Five years or more since opening first Roth IRA
    Contributions Tax No No No Qualified
    Penalty No No No
    Conversions, taxable portion Tax No No No
    Penalty Yes No No
    Conversions, nontaxable portion Tax No No No
    Penalty No No No
    Earnings Tax Yes Yes Yes
    Penalty Yes Yes No

References

  1. "Taxpayer Relief Act Of 1997--Conference Report". 31-July-1997. Retrieved 09-Sep-17. Check date values in: |accessdate= and |date= (help)
  2. spreadsheet Report: The U.S. Retirement Market, Second Quarter 2017
  3. See Non-deductible Traditional IRA
  4. Penalty free withdrawals can also be made by instituting a defined series of Substantially Equal Periodic Payments from an IRA. See SEPP:Substantially Equal Periodic Payments.
  5. Retirement Savings Contributions Credit (Saver's Credit), Publication 571, IRS
  6. Retirement Savings Contributions Credit (Saver's Credit), Publication 571, IRS
  7. Bruno, Maria A.,and Jaconetti, Colleen M., The IRA opportunity: To Roth or not to Roth?, Vanguard Research, (May, 2011).
  8. IRS Publication 590: Roth IRAs
  9. Income ranges for determining IRA eligibility change for 2021, IRS.
  10. What every student should know about summer jobs and taxes, IRS, accessed May 26, 2020.
  11. Roth IRAs for Minors, Fairmark, Kaye A. Thomas, February 7, 2018, accessed May 25, 2020.
  12. T.C. Summary Opinion 2006-127, United States Tax Court, accessed May 25, 2020.
  13. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.247. ISBN 0-9649440-7-3
  14. IRS Publication 590 (2009), Individual Retirement Arrangements (IRAs) Applies for any 2010 rollover from an IRA, except from Roth IRA to Roth IRA.
  15. Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions, Michael Kitces, January 1, 2014, accessed 19 June 2020.
  16. Roth IRA Idea: Burst my bubble
  17. IRA Withdrawals, New Jersey Tax Topic Bulletin GIT-2, accessed August 01, 2020
  18. 18.0 18.1 Fairmark: Roth IRA Distribution Overview, Kaye A. Thomas, February 11, 2018, Accessed 19 June 2020.
  19. Exceptions to the early withdrawal penalty tax on converted assets include total disability, or death. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.248. ISBN 0-9649440-7-3

External links

Bibliography

White papers

Papers: Roth 401(k) and Roth 403(b) Plans

Academic papers