1. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? A form of IRA that –accepts contributions (to certain limits) on a nondeductible basis –provides tax free withdrawals (within certain limits)

2. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it indicated? 1.similar to traditional IRA, indicated when: –want to defer taxes on investment income –long-term accumulation, especially for retirement, is an important objective –supplement or alternative to qualified retirement plan desired

3. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 When is it indicated? (cont) 2.Roth IRA is preferred to traditional IRA when the particular tax benefits under a Roth IRA are a better match for individual’s planning needs.

4. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Advantages 1.eligible individuals may contribute up to a specified limit annually 2.withdrawals tax free if –after 5 year wait and –upon death or disability, –first time home purchase, or –after age 59½

5. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Advantages (cont) 3.Roth IRA contribution eligibility not restricted by active participation in employer’s retirement plan 4.Roth IRA contributions can be made after age 70½ 5.Roth IRAs not subject to required minimum distribution rules until death of owner

6. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Disadvantages 1.Roth IRA contributions limited each year; limit reduced if annual adjusted gross income exceeds certain thresholds 2.early Roth IRA withdrawals in excess of contributions taxed in full and subject to 10% penalty

7. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Tax Implications: Contribution Rules 1.Contribution Limits maximum contribution is LESSER of –the dollar limit or –100% of earned income LESS contributions to traditional deductible or nondeductible IRA

8. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Maximum Annual Contribution Amount (2009) TypeDollar Limit Regular$5,000 Catchup (age 50 and older)$1,000

9. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications: Contribution Rules (cont) 2.AGI Phase-out contribution limits phase out for higher incomes Roth Phase-out AGI Limits (2009) Unmarried individuals$105,000-120,000 Married joint return filers$166,000-176,000 Married separate filers$0-10,000

10. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Tax Implications: Contribution Rules (cont) 3.Time Limits Roth IRA can be established any time prior to due date of tax return without extension no restrictions on contributions made to Roth after taxpayer reaches age 70½

11. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Tax Implications: Contribution Rules (cont) 4.Saver’s Credit limited nonrefundable tax credit available to certain lower income taxpayers who make contributions to a Roth IRA

12. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Tax Implications: Contribution Rules (cont) 5.employer-sponsored Roth IRAs –as limited alternative to a qualified retirement plan –a “deemed IRA” as part of qualified plan

13. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Tax Implications: Contribution Rules (cont) 6.Qualified Roth contribution programs can amend Section 401(k) or Section 403(b) plan so contributions and distributions treated like Roth IRA

14. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Tax Implications: Distribution Rules 1.Treat all Roth accounts as single account when calculating tax consequences of distributions distributions tax free IF made 5 yrs after first contribution and made –on or after age 59½ –after death to a beneficiary or estate –because individual totally and permanently disabled –for first time home purchase

15. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 Tax Implications: Distribution Rules (cont) 2.If Roth IRA distribution is not tax-free as a qualified distribution, total of original nondeductible contributions are treated as distributed first and return of nondeductible contributions is not taxable 10% early distribution penalty imposed on taxable amount unless distribution meets exceptions 3.No minimum distribution requirements at age 70½ but distributions required after death

16. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 Tax Implications: Distribution Rules (cont) 4.Roth IRA must be distributed within 5 years of owner’s death unless owner has a designated beneficiary If have designated beneficiary, Roth IRA can be distributed over life or life expectancy of beneficiary if begin distributions within one year of decedent's death

17. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Tax Implications: Rollovers 1.can roll over one Roth IRA to another Roth IRA tax- free –must complete transaction in 60 days –only 1 rollover per IRA within 12-month period 2.cannot roll over Roth IRA to traditional IRA or to qualified plan or tax deferred annuity

18. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Tax Implications: Rollovers (cont) 3.Traditional IRA or qualified plan (or part of one) can be rolled over to a Roth IRA –no conversion (in years before 2010) if IRA owner’s AGI > $100,000, or if married and file separate return IRA or qualified plan taxable as ordinary income in year of conversion

19. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 True or False? 1.Alice, age 60, has a 6 year old Roth IRA. Alice can withdraw her initial investment and all investment income and gains tax free. 2.Unlike a traditional IRA, no withdrawals from a Roth IRA incur a penalty tax. 3.Amounts contributed to a traditional IRA reduce the amount available to contribute to a Roth.

20. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 True or False? (cont) 4.The first time homebuyer exception can be used anytime the individual or their spouse did not own a principle residence within the preceding two years. 5.A Roth IRA can be rolled over to a traditional IRA.

21. Roth IRA Chapter 6 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 Discussion Question 1.If a taxpayer is eligible for the maximum annual contribution to either a traditional or a Roth IRA, which should be chosen? 2.Is it advisable to convert a traditional IRA to a Roth IRA, assuming that the $100,000 AGI test has been met?