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Under the Taxpayer Relief Act of 1997, a new type of IRA, the Roth IRA, was established. Contributions to a Roth IRA are nondeductible, but if certain requirements are satisfied, all withdrawals from a Roth IRA will be free from income tax. Except as described below, a Roth IRA is treated like any other IRA.
Limits
To be treated as a Roth IRA, the IRA must be so designated when it is established. The maximum yearly contribution to all IRAs for the 2007 tax year is $4,000 ($5,000 for individuals who have attained age 50). For 2008, the numbers increas to $5,000 (and $6,000 for individuals who have attained age 50). Contributions to Roth IRAs and traditional IRAs (both deductible and nondeductible) are aggregated for purposes of applying these limits.
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AGI Limit and Phase-Out Range
Here are the income restrictions associated with 2007 Roth IRA contributions:
In order to make a full contribution to a Roth IRA for 2007, a married taxpayer filing jointly must have joint adjusted gross income (AGI) of $166,000 or less for that year, and a single taxpayer must have AGI of $114,000 or less for that year. The AGI phase-out range (i.e., the range in which less-than-full contributions may be made) for Roth IRAs is between $156,000 and $166,000 for married taxpayers filing jointly and between $99,000 and $114,000 for single taxpayers. A married taxpayer filing a separate return for a year generally may not contribute to a Roth IRA for that year.
Here are the income restrictions associated with 2008 Roth IRA contributions:
The amount a single taxpayer can contribute is phased out if your AGI is between $101,000-$116,000 for 2008. Which means if you earn less than $101,000 in 2008 you are welcome to make a full Roth contribution. If your AGI exceeds $116,000 for 2008 then you can not make any Roth contributions.
The amount married persons filing jointly can contribute is phased out if your AGI is between $159,000-$169,000 for 2008. Which means if you earn less than $159,000 in 2008 you are welcome to make a full Roth contribution. If your AGI exceeds $169,000 for 2008 then you can not make any Roth contributions.
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After Age 70½
Unlike traditional IRAs, an individual may contribute to a Roth IRA even after he or she has attained age 70-1/2. Also, the age 70-1/2 mandatory distribution requirements and the incidental benefit rules do not apply to Roth IRAs. Thus, no distributions are required until the IRA holder's death.
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Rollovers and Conversions
A traditional IRA may be rolled over or converted penalty-free to a Roth IRA, provided that the individual's AGI (or joint AGI with his or her spouse) for the taxable year of rollover or conversion is not more than $100,000 and the individual is not married filing separately. Also, any rollover must be a "qualified rollover contribution," that is, a rollover contribution that meets the general IRA rollover rules, including the 60-day time limit rule. However, the rule that prohibits multiple IRA rollovers within a twelve-month period does not apply.
Both deductible and nondeductible traditional IRAs may be converted or rolled over under these rules. Distributions from traditional IRAs will generally be taxable in the year of conversion or rollover to the extent they would otherwise be taxable if they were not part of a qualified rollover distribution. For purposes of the $100,000 limit, AGI is determined before any amount includable in income as a result of the rollover or conversion.
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Qualified Distributions
"Qualified distributions" from a Roth IRA are not includable in income. A qualified distribution is a distribution that is made after the five-taxable year period that began with the first taxable year for which the individual (or the individual's spouse) made a contribution (including a rollover or conversion contribution from a traditional IRA) to the individual's Roth IRA and which is:
made on or after the date the individual attains age 59-1/2;
made to a beneficiary (or to the individual's estate) after the individual's death;
a distribution attributable to the individual's being disabled; or
a "qualified special purpose distribution" (which means a qualified first-time homebuyer distribution).
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Nonqualified Distributions
Distributions from Roth IRAs that are not qualified distributions are treated as made first from already-taxed dollars (i.e., contributions, rollovers and conversions). Therefore, until the total of all distributions from an individual's Roth IRA (or Roth IRAs) exceeds the amount of already-taxed dollars, the distribution(s) will not be includable in income. Also, for purposes of determining the tax treatment of IRA distributions, Roth IRAs and traditional IRAs are treated separately.
For more information concerning Roth IRAs please link to www.rothira.com
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