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The 2008 IRA Contribution Deadline is Wednesday, April 15, 2009
Contribution Limits |
|
2008 |
2009 |
| $5,000 | $5,000 |
Catch Up Contribution |
|
| Add $1,000 if you turned 50 before 12/31/2008. | |
Who Can Contribute?
Any individual with income and non-working spouses; subject to income limitations.
In general, the requirements for participation in a Roth IRA are the same as those for a traditional IRA, except that a participant can contribute to a Roth IRA after attaining the age of 70½ and there are no required distributions at age 70½ as with a traditional IRA.
Why participate in a Roth IRA?
- Earnings accumulate tax-free
- Qualified distributions are tax and penalty free
- Contributions can always be recovered tax and penalty free
For more information visit www.irs.gov.
Roth IRA Contribution Limits
Roth IRA contribution limits are identical to those for the traditional IRA. However, unlike traditional IRAs, the ability of a participant to contribute to a Roth IRA may be limited by his adjusted gross income. The maximum amount of regular contributions that can be contributed to a Roth IRA is the lesser of 100% of a participant’s compensation or $5,000 (2008) and $5,000 (2009). The maximum contribution limit is phased out depending upon the participant’s modified gross income and filing status, as shown below.
| If Modified Adjusted Gross Income is: | Maximum Contribution Amount Is: | |
| 2008 | 2009 | |
| $0-101,000 | $0-105,000 | $5,000 |
| $101,000-$116,000 | $105,000-120,000 | Contribution is phased out |
| $116,000 or greater | $120,000 or greater | No contribution permitted |
| If Modified Adjusted Gross Income is: | Maximum Contribution Amount is: | |
| 2008 | 2009 | |
| $0-$159,000 | $0-166,000 | $5,000 |
| $159,000-$169,000 | $166,000-176,000 | Contribution is phased out |
| $169,000 or greater | $176,000 or greater | No contribution permitted |
| If Modified Adjusted Gross Income is: | Maximum Contribution Amount is: |
| $0-$10,000 | Contribution is phased out |
| $10,000 or greater | No contribution permitted |
* For participants who are eligible to make an IRA contribution and have attained the age of 50 before the end of the taxable year, the participant can make a "catch-up" contribution in addition to the normal contribution amount as shown in the table above. For the year 2006 and beyond, the catch-up contribution limit will be $1000. The maximum contribution cannot exceed 100% of actual compensation.
** After 2008, the annual limit will be raised to $500 increments in accordance with Cost of Living Adjustments (COLA).
Important Things To Remember
- Who can contribute? Any individual with income, subject to income limitations.
- Contributions are aggregated with Traditional IRA Contributions – The contributions to a Roth IRA are aggregated with contributions to a traditional IRA for the purposes of the annual maximum contribution limit. In other words, an individual may contribute to both a traditional and a Roth IRA for a given year, but the total amount of contributions to both accounts may not exceed $5,000 for a tax year 2008 or $5,000 for 2009.
- Deductibility of Roth IRA Contributions – Contributions to a Roth IRA are not deductible. All contributions to a Roth IRA can be recovered tax and penalty free.
- Contributions permitted after age 70½.
- Distributions: Distributions from a Roth IRA are tax and penalty free after the five year holding period has passed and the participant has either reached the age of 59½ , has died or has used the distribution for a qualified first time home purchase (limited to $10,000 over a lifetime). Other exceptions may also apply. Visit www.irs.gov for more details.
- Early Withdrawal of Earnings: Earnings on contributions will be subject to a 10% penalty by the IRS if withdrawn prior to the mandatory five year holding period and prior to age 59 ½.
- • Deadline for Contributions: Contributions may be made (and account may be established) no later than the due date for filing income tax returns for the year for which the contribution is being made, not including extension, generally April15th. Stated another way, contributions for a prior year can be made up to April 15th of the current year.The 2008 Contribution Deadline is Midnight on Wednesday, April 15, 2009.
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Roth Rollover and Conversion Contributions
Qualified rollover contributions to a Roth IRA include Roth-to-Roth IRA rollovers and conversion of traditional IRA assets to a Roth IRA. Rollovers from an employer-qualified plan to a Roth IRA are not permitted.
Roth to Roth IRA Rollovers
Rollovers of assets from one Roth IRA to another Roth IRA follow the rules for traditional IRA rollovers. For assets to be eligible for rollover they must have come from an account that has had no rollover contributions or distributions within the prior 12 months. Roth-to-Roth rollovers are reported to the IRS.
Conversion from a Traditional IRA to a Roth IRA
Any conversion of assets from a traditional IRA to a Roth IRA after 1998 is fully includible in the gross income of the IRA participant in the year in which the distribution from the IRA is made. The rules for recovery of non-deductible contributions from the traditional IRA will apply. The 10% additional tax that applies to premature distributions will not apply to distributions that are converted to a Roth IRA.
If a taxpayers modified adjusted gross income exceeds $100,000 for a given tax year, or if the taxpayer is married and filing separately, conversions of traditional to Roth are not permitted. An IRA participant is prohibited from converting a required minimum distribution.
Distribution of assets from the traditional IRA will be reported on IRS Form 1099R, and the conversion contribution to the Roth IRA will be reported on IRS Form 5498.
Re-characterizations
A participant may re-characterize contributions in one of three ways:
- By “transferring” a regular contribution made to a Roth IRA plus earnings to a traditional IRA. This may occur when a participant learns that she is ineligible to make a Roth IRA.
- By “transferring” a regular contribution made to a traditional IRA plus earnings to a Roth IRA. This may occur when a participant learns that he will be ineligible to take a deduction for his traditional IRA contribution.
- By reversing a contribution plus earnings made from a traditional IRA to a Roth IRA. This may occur when the IRA participant’s adjusted gross income is too high to allow the Roth conversion
Regardless of the type of re-characterization, both the distribution and the contribution are reported to the IRS.
Roth IRA Distributions
Qualified Distributions
“Qualified Distributions” from a Roth IRA may be recovered tax and penalty free if the distributions satisfy two conditions:
- The distribution is made from the Roth IRA after a period of five years has elapsed since the first day of the year in which the first contribution was made to the Roth IRA, and;
- One of the following conditions is satisfied:
- The participant had attained the age of 59 ½
- The distribution is made to the participant’s beneficiary after the participant’s death
- The participant is disabled
- The distribution is used for qualified first time home purchase expenses
- The distribution is used for qualified education, medical or unemployment expenses. Visit www.irs.gov for more details.
If the Roth IRA distribution meets both of the conditions above, the distribution is not included in the gross income of the individual.
Non-qualified Distributions
A distribution from a Roth IRA that does not meet the requirements of a qualified distribution, and is neither rolled over to another Roth IRA nor re-characterized to a traditional IRA, is considered a non-qualified distribution.
- A non-qualified distribution is taxable only when all of the aggregate contributions in the Roth IRA have been distributed. In other words, only the earnings in a Roth IRA are taxable when a distribution is non-qualified.
- The IRS has implemented ordering rules that define the order in which distributions are made from a Roth IRA. Distributions are made first from regular Roth IRA contributions, next from conversion contributions, and finally from earnings.
- The taxable portion of the non-qualified distribution may be subject to the 10% additional tax on premature distributions if it does not qualify for any of the exceptions to the premature distribution penalty.
- The amount of a non-qualified distribution that comes from conversion contributions may be subject to an additional 10% penalty, if the distribution is made before 5 years have elapsed, since the first day of the year in which the conversion was made.
Withholding
Distributions from a Roth IRA are subject to federal income tax withholding at the rate of 10% unless the participant elects to waive withholding.
Required Distributions at Age 70½
Roth IRA accounts are not subject to the required minimum distribution regulations.
IRS Reporting Requirements for Roth IRA’s
Tax reporting requirements for a Roth IRA are identical to those for a traditional IRA.
Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor.