< Back To Article List

Roth Conversions: Part II Roth Basics

Posted on

In Part I of the “Roth Coversion Series”, we considered the nuts and bolts of a Traditional IRA. With all the talk of converting to a Roth (In essence moving a Traditional IRA to that of a Roth.), we certainly want to know more about this type of retirement account. What is all the hype about?

Definition

A Roth individual retirement account (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. You can contribute up to the lesser of $5,000 in 2015, or 100 percent of your taxable compensation to a Roth IRA. In addition, individuals age 50 or older can make an extra “catch-up” contribution of up to $1,000 in 2015. Contributions to a Roth IRA are not tax deductible, but the funds grow tax deferred and distributions are tax free under certain conditions.

 Prerequisites

  • You have taxable compensation (i.e., wages, self-employment income) during the year of the contribution
  • Your modified adjusted gross income (MAGI) for 2010 must be:
    • $116,000 or less for a full contribution if your tax filing status is single or head of household (partial contribution allowed, up to MAGI of $131,000)
    • $183,000 or less for a full contribution if your tax filing status is married filing jointly or qualifying widow(er) (partial contribution allowed, up to MAGI of $193,000)
    • $10,000 or less for a partial contribution if your tax filing status is married filing separately and you lived with your spouse at any time during the year (full contribution not allowed)

Note: These income ranges are for the 2015 tax year, and are indexed for inflation.

 Key Strengths

  • Qualified distributions are completely tax free (and penalty free)
  • You can contribute after age 70½ (as long as you have taxable compensation)
  • You have flexibility in withdrawing your funds prior to retirement
  • You are not required to take any distributions while you are alive
  • Contributions can be made even if you are covered by an employer-sponsored retirement plan
  • IRAs offer a wide range of investment choices
  • $1,000,000 (and in some cases more) of IRA assets are protected in the event of bankruptcy under federal law

 Key Tradeoffs

  • You receive no tax deduction when you make a contribution
  • If a withdrawal does not qualify for tax-free status, the portion that represents earnings is subject to federal income tax (and perhaps an early withdrawal penalty if under age 59½)
  • Special penalty provisions may apply to withdrawals of Roth IRA funds that were converted or rolled over from a traditional IRA, SEP IRA, or SIMPLE IRA

How Is It Implemented?

  • Open a Roth IRA with a bank, financial institution, mutual fund company, life insurance company, or stockbroker
  • Select types of investments to fund the Roth IRA (e.g., CDs, mutual funds, annuities)
  • Make contributions up to the due date of your federal income tax return for that year (usually April 15 of the following year), not including extensions
  • Roll funds from a Qualified Retirement Account or Traditional IRA at any time

Part III of the Roth Conversion series will compare Traditional IRAs to Roth IRAs.

DISCLAIMER: Information provided by Hoyle, CPA, PLLC on social media, on its website, and related free information distributed via email is intended for reference only. The information is designed solely to provide guidance and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations. Responding to such inquiries does NOT create a professional relationship between Hoyle, CPA, PLLC and participant and should not be interpreted as such. Although Hoyle, CPA, PLLC has made every reasonable effort to ensure that the information provided is accurate, Hoyle, CPA, PLLC, and its shareholders, managers, and staff, make no warranties, expressed or implied, on the information provided. The participant accepts the information as is and assumes all responsibility for the use of such information.