Roth IRAs

A new type of IRA became available to taxpayers in 1998. The "Roth IRA" is unique in that no deduction is allowed when contributions are made to the IRA, but, if certain requirements are met, no federal income tax is due when qualifying distributions are taken from the IRA.

Joint filers with adjusted gross incomes (AGI) above $169,000 and single taxpayers with AGIs above $116,000 cannot contribute to Roth IRAs. Eligibility to contribute begins to phase out when joint AGI reaches $159,000, and when single-filer AGI reaches $101,000. The annual contribution limit for a Roth IRA is the same as for traditional IRAs, but this must be reduced by any contributions made to traditional IRAs for the year. Active participants in an employer-sponsored qualified retirement plan may contribute to a Roth IRA if otherwise eligible without regard to the AGI phaseout range for active participants contributing to a traditional IRA. Contributions may be withdrawn at any time without taxation or penalty.

The following chart summarizes the annual contribution limits for Roth IRAs, which hinge on the taxpayer's filing status and AGI level:

*The taxpayer's AGI is determined without regard to any deduction for contributions to a traditional IRA, and without regard to any income resulting from the conversion of a traditional IRA to a Roth IRA. For a Roth IRA, the contribution limits based on AGI apply regardless of whether the taxpayer or spouse is an active participant in an employer's qualified retirement plan. The AGI phaseout range for taxpayers who are married filing separately is zero to $10,000. If such a taxpayer's AGI is more than $10,000, a Roth IRA contribution is not permitted. The applicable dollar limits ($159,000 and $101,000 etc.) in the AGI Levels listed above are inflation-indexed beginning in 2008, with any increase being rounded to the nearest multiple of $1,000.

**For taxpayers in the middle range whose contribution limit is reduced: multiply $5,000 (or $6,000 if age 50 or over) by a fraction, the numerator being the excess of the taxpayer's AGI over $159,000 if married filing jointly or $101,000 if single or head of household, and the denominator being $10,000 if married filing jointly or $15,000 if single or head of household. Subtract the result from $5,000 to get the maximum contribution by the taxpayer; however, a $200 minimum contribution may be made when the AGI phaseout lowers the contribution limit to less than $200 but more than zero.

After the owner has had a Roth IRA for at least five years, the earnings may generally be withdrawn federal income tax free—

• after the owner reaches age 59½,
• following the owner's death,
• following the owner's disability (as defined by the Internal Revenue Code and tax regulations), or
• if used for qualifying first-time homebuyer expenses ($10,000 lifetime maximum).

Traditional IRAs may be converted into Roth IRAs, but the distribution from the traditional IRA will be subject to federal income tax when received. However, the 10% premature distribution tax will not be imposed unless funds are withdrawn from the Roth IRA within five years of each year's conversion amount. If the taxpayer is under age 59½ at the time of the distribution of the converted amount, the distribution will be subject to a 10% penalty tax unless one of the IRC Sec. 72(t) exceptions applies. Conversions to Roth IRAs can only be made by taxpayers with adjusted gross incomes of no more than $100,000 regardless of filing status (except that married persons filing separately cannot convert a traditional IRA to a Roth IRA at all). The conversion amount itself does not count toward the $100,000 AGI maximum.

The required minimum distribution rules [IRC Sec. 401(a)(9)(A)] that apply to traditional IRAs and qualified retirement plans do not apply to lifetime distributions from Roth IRAs. Thus, distributions need not begin by April 1 of the year following attainment of age 70½. Further, contributions may continue beyond age 70½ if the individual or spouse is still working. Minimum distributions must be made after the death of the Roth IRA owner.

Distributions from all Roth IRAs are subject to an ordering rule, no matter which Roth IRA the distribution is taken from: contributions first, then conversion amounts included in income (on a FIFO basis), then conversion amounts not included in income (on a FIFO basis), and finally earnings.

	Roth IRA	Traditional IRA
Maximum contribution (2008):
age 49 and under	$5,000**	$5,000**
age 50 and over	$6,000**	$6,000**
Contributions allowed after age 70½?	yes	no
Maximum deduction (2008):
age 49 and under	zero	$5,000*
age 50 and over	zero	$6,000*
Active participant in employer plan?	irrelevant	important
Joint return phaseout range (2008)	$159,000-169,000	$85,000-105,000*
Single taxpayer phaseout range (2008)	$101,000-116,000	$53,000-63,000*
Tax-deferred earnings?	yes	yes
Income tax-free withdrawals after 5 years?	yes, potentially	no
Withdrawals after age 59½ without 10% penalty?	yes, potentially	yes, potentially
Required minimum distributions after age 70½?	no	yes

*For tax-deductible contributions.

**Lesser of this dollar limit or 100% of earned income.