© 2016 Joan E. Emery
1. In mid-2014, it was estimated that 31.1 million U. S. households owned traditional Individual Retirement Accounts ("IRAs") and 19.2 million U. S. households owned Roth IRAs. Since some households own both traditional IRAs and Roth IRAs, the totals overlap to some degree.
2. The general rules regarding Roth IRAs are as follows:
a. Contributions are not tax deductible.
b. Earnings on contributions are not subject to federal income tax if the earnings are distributed as part of a qualified distribution. See 2.g., below.
c. Income Limits – A person’s ability to contribute to a Roth IRA is affected by the amount of that person’s modified adjusted gross income (“MAGI”). Below specified levels of MAGI, a person can make a contribution to a Roth IRA up to the contribution limit. In certain MAGI mid-ranges, the amount of the contribution is reduced. Above certain specified MAGI amounts, the ability to contribute to a Roth IRA is eliminated. Special rules apply to traditional IRAs which are converted to Roth IRAs and to rollovers from a qualified retirement plan to a Roth IRA.
d. Contribution Limits
1. If the income limits are not exceeded, the following rules apply:
a) Contributions are permitted if the person has earned income and contributions are permitted at any age. A spouse is permitted to make a contribution if a joint income tax return is filed and contributions are permitted at any age.
b) The contribution limits are as follows:
i) Through age 49: lesser of 100% of earned income or $5,500 per person;
ii) Age 50 or Over: lesser of 100% of earned income or $6,500 per person; and
iii) The Kay Bailey Hutchison Spousal IRA Limit, which applies to both traditional IRAs and Roth IRAs, may affect the amount that may be contributed to the IRA of the spouse who earns less.
c) Traditional and Roth IRA contributions are added together to determine if the person’s contribution limit has been reached. Employer contributions to a SEP or SIMPLE IRA are excluded from this calculation.
2. The general contribution limits do not apply to a conversion of a traditional IRA into a Roth IRA or the rollover from a qualified retirement plan to a Roth IRA. However, special rules apply to these conversions and rollovers. The general rule is that the amount in a traditional IRA or qualified retirement plan, which will be rolled into a Roth IRA and which is not a return of basis, must be included in gross income for the year in which the conversion or rollover occurs.
e. Due Date of Contributions – Contributions may be made until the due date of the person’s return. An extension of time to file the return does not extend the contribution due date.
f. Mandatory distributions are not required during the lifetime of the person who establishes the Roth IRA.
g. Taxation of Distributions
1. Qualified distributions are not subject to federal income tax. The general definition of a qualified distribution is a distribution received (a) by the person who established the Roth IRA if at least 5 years
have elapsed since the Roth IRA was established and the person who established the Roth IRA (i) is at least 59.5 years of age, or (ii) is disabled, or (iii) satisfies the qualified first-time home buyer exception, or (b) if the person who established the Roth IRA is deceased.
2. In addition to federal income tax, a 10 percent additional federal tax applies to distributions which are not qualified distributions unless one of the specifically listed exceptions applies. The 10 percent additional tax may not apply if :
a) The recipient is at least age 59.5; or
b) The recipient is totally and permanently disabled; or
c) The recipient is the beneficiary of a deceased IRA owner; or
d) The distributions are part of a series of substantially equal payments; or
e) The distribution is used to pay:
i) Eligible medical expenses which exceed certain limits; or
ii) Eligible unemployed worker’s medical insurance premiums; or
iii) Qualified first-time home buyer expenses; or
iv) Qualified higher education expenses; or
f) Certain other specified exception requirements are met.
I am an attorney practicing in the Chicago area.