Retirement & Benefits

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Retired Public Utilities Executive
StockCross Client


Open a Roth IRA

What is a Roth IRA?

A Roth IRA is a retirement account whereby individuals can put up to $5,500 per year of compensation into the plan. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. While in the plan, asset growth, dividends and interest are not taxable and monies withdrawn from the plan are tax-free under certain conditions.

Who can establish a Roth IRA?

A Roth IRA can be established by an individual of any age provided certain compensation thresholds are met. The fact that an individual participates in a company, agency or not-for- profit retirement plan (SEP IRA, SIMPLE IRA, 401(k), 403(b), etc.) does not preclude the individual from establishing a Roth IRA.

What is compensation (earned income)?

Compensation (earned income) represents income that was actually worked for, such as wages, salaries, tips, professional fees, bonuses and self-employment income. It does not include earnings and profits from property, such as rental income, interest income and dividend income. It also does not include earnings from social security benefits, pensions or annuities.

When is the deadline to make a contribution to a Roth IRA?

Contributions can be made to your Roth IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2011 must be made by April 15, 2012.

What are the Spousal IRA limits?

If you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your Roth IRA is the smaller of the following two amounts:
  1. $5,500, or
  2. The total compensation includable in gross income of both of you and your spouse for the year, reduced by the following two amounts.
    • Your spouse’s Roth IRA contribution for the year.
    • Any contributions for the year to a traditional IRA on behalf of your spouse.
Note: This means that the total combined contributions that can be made for the year to your Roth IRA and your spouse’s Roth IRA can be as much as $11,000. Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA.

Are there age limits on Roth IRA contributions?

No, there are no age limits on contributions to a Roth IRA. A young child with earned income can make a Roth IRA contribution if it is deemed appropriate. Also, unlike a traditional IRA, persons over age 70 ½ can still make Roth IRA contributions as long as they have earned income and are not otherwise restricted by the AGI limitations.

Are there any restrictions on the type of contributions that can be made to a Roth IRA?

All contributions must be in the form of money (cash, check or money order). Property cannot be contributed. However, you may be able to convert all or a part of the assets from a traditional IRA to a Roth IRA.

Are annual contributions required?

No, you do not have to contribute to your Roth IRA for every tax year, even if you can.

If I don’t contribute the maximum in one year, can I “catch-up” in future

No, if contributions to your Roth IRA for a year were less than the limit, you can not contribute more in a later year to make up the difference.

If I am over age 50, may I make an additional contribution?

If you are 50 or older by the close of the taxable year, you may make an additional contribution to your Roth IRA of $1000.

Can Roth IRA assets be moved or rolled over?

You may also be able to withdraw all or a part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions) and may be subject to the 10% tax on early distributions.

What are the tax consequences when an amount is converted to a Roth IRA?

Any amount that is converted to a Roth IRA is includable in gross income as a distribution for the taxable year in which the amount is distributed or transferred from the traditional IRA. Thus, any portion of the distribution or transfer that is treated as a return of basis is not includable in gross income as a result of the conversion. The 10% additional tax generally does not apply to the taxable conversion amount. The conversion is also not treated as a rollover for purposes of the one-rollover-per-year rule.

Are there any required distributions?

No, the required minimum distribution rules at age 70 ½ that apply to traditional IRAs do not apply a Roth IRA until after the owner’s death. Thus, a Roth IRA owner is not required to take any distributions during his lifetime and upon his death, the distributions are tax-free to his beneficiaries.

What constitutes as a qualified tax-free distribution from a Roth IRA?

A distribution from a Roth IRA is penalty-free if it is made:
  • After the owner reaches age 59 ½,
  • To a death beneficiary or the individual’s estate,
  • After the owner becomes disabled,
  • For expenses used to buy, build or rebuild a first home of the owner, the owner’s spouse, their children, grandchildren and ancestors (subject to a $11,000 lifetime cap),
There is a 10% penalty for early withdrawals for any other reason, with certain exceptions,
  • if distributions are not more than qualified higher education expenses,
  • if unreimbursed medical expenses exceed 7.5% of adjusted gross income,
  • if one’s withdrawals are annuitized (series of substantially equal periodic payments), or
  • if an individual collects federal unemployment benefits for 12 consecutive weeks and uses withdrawals to pay for health insurance.
Importantly, however, no qualified tax-free distributions can be taken until the Roth IRA has existed for five years. The five-year “clock” starts with the first year for which a contribution is made, not necessarily the calendar year in which the contribution is actually made (contributions can be made up until April 15 for the prior calendar year).

Nonqualified distributions are includable in the individual’s income to the extent attributable to earnings (you have basis in your contributions) and are subject to a 10% penalty tax applicable to early withdrawals, unless an exception applies. The 10% penalty for early withdrawal is imposed in addition to the taxes imposed on the non-qualified distribution.

How are non-qualified distributions handled?

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. For purposes of determining the correct tax treatment of distributions (other than the withdrawal of excess contributions and earning on them, discussed earlier), there is a set order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. The order of distributions is as follows.
  1. Regular contributions.
  2. Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). These conversion contributions are taken into account as follows:
    • Taxable portion (the amount required to be included in gross income because of the conversion) first, and then the
    • Nontaxable portion
  3. Earnings on contributions.
Rollover contributions from other Roth IRAs are disregarded for this purpose.

Can distributions from a Roth IRA be used to satisfy minimum required distribution requirements for traditional IRAs?

No. Nor can distributions from traditional IRAs be used for required distributions from Roth IRAs (after death).

Who can be designated as the beneficiary of a Roth IRA, and can the designation later be changed?

Any individual or legal entity can be designated as the beneficiary of a Roth IRA account. The IRA holder may change the designation at any time prior to the death of the IRA holder.

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Investors should consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus and, if available, the summary prospectus contain this and other information about the investment company.  To obtain a prospectus contact StockCross at 800.993.2015. Read the prospectus carefully before investing.

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