IRA's and Roth's

Learn more about IRA's and Roth's

Update:  August 2006

Pension Protection Act has provision that removes the $100,000 income limit on converting regular IRA's into Roth IRAs.  The income limit will be removed from 2011 through 2015 and will allow high income taxpayers to convert their IRAs during that period.

By what date must I make my IRA contributions?

By the due date of the return, or April 15 of the year after the year you're paying taxes on. There are no extensions. With a SEP you can include extensions. Keoghs must be set up by December 31, but you have until the tax filing due date including extensions to make the contributions.

Should I pay tax now to convert my existing IRA to a Roth IRA? And should I have a traditional IRA or a Roth IRA? 

Here are the factors to consider:

1. Your age. The younger you are the more you will benefit from tax­free accumulations.
2. Your tax bracket. A conversion to Roth can push you into a higher bracket. On the receiving end, tax­free distributions will be of relatively greater benefit to a retiree who is lucky enough to be in a high income tax bracket. Converting might pay if you have high expenses or a net operating loss carryover from your business that can be used to lessen the tax impact of conversion.
3. Tax Payments. The income tax you have to pay on the converted funds should be paid out of your non­IRA funds if at all possible. You will be hit with the 10% penalty for early withdrawal on the funds not converted to the Roth, if under 59 1/2 years old.
4. Eligibility for deductibility of contribution. The Roth IRA is ideal for you if you can't make deductible IRA contributions.
5. Estate planning considerations. The Roth IRA works well to ease the income tax burden of beneficiaries (other than the spouse) who are going to get hit with both an estate tax and income tax. They will still have to pay estate tax, but the Roth would eliminate the income tax obligations. For a surviving spouse beneficiary the amounts are completely tax-free income since estate tax is not an issue here.
6. Flexibility. The Roth has no rule about mandatory distributions and you can contribute to the Roth as long as you have sufficient earned income, factors for the over 70 1/2 year old crowd to consider.
7. Future shock. Will you be in a high tax bracket or a low one when you retire? Will Congress enact new legislation to change the rules again? If you have a crystal ball, and know that the Roth will be affected, it could affect your decision.

What are the situations in which I can withdraw from my IRAs without paying tax or penalties?

The following can be taken penalty free. You may still owe income tax on these withdrawals:

1. Up to a $10,000 lifetime maximum for first­-time home buyers 
2. For education
3. When you're disabled
4. By a beneficiary of an IRA of someone now deceased

You will no longer be hit with the 10% penalty for an early withdrawal made for education, first home­buying up to $10,000 lifetime, if you're disabled, or if you're an IRA beneficiary. These exceptions applied to traditional –not just Roth- IRAs beginning in 1998.

All withdrawals from regular IRA's are subject to tax. Withdrawals that you can make from a Roth IRA that will always be tax-free are those that represent principal ­­­that you have actually paid in. The earnings portion of a Roth distribution is tax free if withdrawn after the five year holding period, which begins on the first day of the first year for which contributions were made, and one of the following applies: 

1. Taxpayer's age is at least 59 ½
2. Distribution is due to death or disability 
3. Distribution is made to a qualified first time home buyer

I am 62 now. Would it be wise to take distributions before I have to?

Some general guidelines to follow in deciding this issue are:

If you need the money just to survive, or you are in a lower tax bracket than you will be when you must start making distributions, it may be reasonable to draw down some of that money.

One rule to follow is not to take from your IRA simply to deposit what's left after taxes into another investment in your own name. All you accomplish is to stop the tax­deferred build­up and replace it with a taxable investment.

What do I have to do once I reach age 70 1/2?

The information for this question is outdated, please click on the following link... IRA Rules for current information.

Two of the most important financial decisions of your life must be made by APRIL 1 of the year after you reach this critical age. The distribution method and the selection of beneficiaries for your IRAs, 401(k)s, and other tax deferred retirement plan moneys.

You can name a new beneficiary later, but you can never alter the distribution method chosen or the life expectancy. The distribution method is irrevocable once elected, and has long term effects on how quickly or slowly the monies are paid out to you and taxed. This is definitely one area where seeking good tax advice is recommended from someone who is very familiar with these tax laws.

It is important that you take an active role in this decision making process, and make the election before the April 1 deadline. If you do not, the election frequently defaults to a recalculation method, which may not be right for you.

What is the new Roth IRA?

Beginning in the tax year 1998, a new nondeductible "Roth" IRA was made available. Here are the Roth IRA basics:

1. Nondeductible contributions
2. Eligibility is limited by income, phasing out between $95,000 and $110,000 for single. For those filing married joint between $150,000 and $160,000, and for married filing separately between $50,000 and $100,000.
3. Withdrawals are tax­free if made at or after 59 1/2 years of age and if the funds invested have been held for at least five years
4. You may withdraw the principal (the amount you have actually invested) at any time and for any reason without paying penalties or taxes
5. Being an active participant in your company's plan does not make you ineligible to contribute to a Roth IRA

Now you can contribute up to $4,000 each year, compared to $3,000 in 2004. If you are 50 or older, you can put aside as much as $4,500. You must have earned income of at least the amount you contribute.

Taxpayers with income of $100,000 or less may convert an existing IRA to a new Roth IRA. To convert, you must pay income tax on the entire amount that you convert from your traditional IRA, but the converted amount does not count as income toward the $100,000 limit on income allowable if you're converting.

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