Roth IRA Early Withdrawal Penalty, taxes roth ira.

#Taxes #roth #ira


The Roth IRA Early Withdrawal Penalty

What’s the Roth IRA early withdrawal penalty?

Typically, it’s a 10% penalty on investment gains withdrawn from your Roth IRA prior to age 59 ВЅ.

This means that unless you meet one of the early withdrawal exceptions, your withdrawal must meet two criteria in order to be classified as a qualified distribution which is tax-free and penalty-free.

What are the two criteria?

  • Reached age 59 ВЅ
  • Funded your Roth IRA for at least 5 years

You must meet both requirements before you can confidently withdraw funds tax-free and penalty-free from your Roth. Of course, there are exceptions.

So let’s take a closer look at the rules.

Roth IRA Distributions After Age 59 ВЅ

Any distributions of investment gains taken from your Roth IRA prior to age 59 ВЅ are considered early withdrawals.

Other than the exceptions highlighted below, early withdrawals are subject to income taxes as well as the Roth IRA early withdrawal penalty.

Notice the phrase “of investment gains.” That’s important.

Because you need to differentiate between your original Roth IRA contribution and the earnings (investment gains) which result from that contribution.

Original Roth IRA contributions can be withdrawn at any time tax-free and penalty-free.

After all, Roth IRA contributions are non-deductible, so you funded your Roth IRA with after-tax funds. Because you’ve already paid income taxes, you shouldn’t have to pay a second tax bill just to gain access to your money.

But Roth IRA investment gains are a different story.

Think about it. If you have investment gains in a regular taxable brokerage account, those gains are subject to taxation. And we both know how much the government loves to tax your money.

So if you make an early withdrawal of investment gains from your Roth IRA, the government is going to want its share.

So remember, you can withdraw your original Roth IRA contribution at any time tax-free and penalty-free.

But if you withdraw any Roth IRA investment gains prior to age 59 ВЅ, then you’ll owe income taxes and a 10% Roth IRA early withdrawal penalty on those funds.

Find that hard to follow?

Here’s an example.

At age 25, you open a Roth IRA and contribute $3,000. You never make any additional contributions.

Fifteen years later, you decide to close the account. It’s now worth $10,000.

How much of that $10,000 do you get to keep?

Well, in closing the account early, you don’t owe any taxes or penalties on $3,000 of the $10,000.

Because you can withdraw your original contribution any time both tax-free and penalty-free.

But the remaining $7,000 is considered an investment gain. As a result, it’s subject to income taxes and a 10% Roth IRA early withdrawal penalty.

So assuming a tax rate of 25%, you owe $1,750 in income taxes as well as a $700 early withdrawal penalty. Meaning $2,450 of the $10,000 goes to taxes and penalties.

That leaves you with a grand total of $7,550 after closing your account.

An early withdrawal of your original contribution is always.

Tax-free and penalty-free.

But an early withdrawal of your investment gains prior to age 59 ВЅ is subject to.

A 10% Roth IRA early withdrawal penalty as well as applicable income taxes.

The 5 Year Rule

Even if you reach age 59 ВЅ, you still need to meet one more requirement before you can withdraw funds tax-free and penalty free.

And as a general rule, it means your Roth IRA needs to be funded for at least 5 tax years before you can make tax-free and penalty-free withdrawals.

Need an example?

Let’s say at age 59 your accountant informs you that it’s a good idea to convert your Traditional IRA to a Roth IRA. You do that in the year 2007, paying the applicable income taxes required by such a conversion.

The funds continue to grow and in 2010, at age 62, you decide to withdraw those funds.

Can you do so tax-free and penalty-free?

Even though you’ve reached and surpassed age 59 ВЅ, you still haven’t met the 5 year rule for that portion of your money which represents the conversion. And you need to meet the 5 year rule before you can withdraw your investment gains tax-free and penalty-free.

The original contributions can still be withdrawn tax-free and penalty-free.

But the investment gains need to meet the 5 year rule before they can be withdrawn tax-free and penalty-free.

In this case, only four tax years have passed. 2007. 2008. 2009. and 2010.

You meet the requirements of the 5 year rule and are able to withdraw funds in the January following the fifth tax year.

In this case, 2011 is the fifth tax year. So January 2012 is when you can start to withdraw investment gains both tax-free and penalty-free from you Roth IRA.

Early Withdrawal Exceptions

By now we’ve learned that if your Roth IRA meets the 5 year rule and you’ve reached age 59 ВЅ, then you can withdraw funds tax-free and penalty-free.

But are there other cases when you can withdraw investment gains from your Roth IRA without having to pay taxes and penalties?

Tax-Free, Penalty-Free Withdrawals

Tax-free, penalty-free withdrawals are known as qualified distributions, and there are a number of cases where you can take qualified distributions prior to age 59 ВЅ and even before you’ve met the 5 year rule.

Below are three (3) such instances.

1) Death – You avoid triggering the Roth IRA early withdrawal penalty if you die and your beneficiary closes your Roth IRA account. Apparently, the IRS finds it highly unlikely you’ll hatch a conspiracy to die in order to avoid paying a 10% penalty. As a result, your beneficiaries can withdraw funds without getting hit with an early withdrawal penalty.

2) Disability – If you become disabled according to the definition in IRS Code Section 72(m)(7) and IRS Publication 590, then you can take a distribution from your Roth IRA tax-free and penalty-free. However, make sure you consult with a tax attorney or an accountant in order to verify that you meet the government’s definition of “disabled.” You don’t want to get hit with unexpected taxes and penalties!

3) Purchase of a First Home – If you withdraw funds to pay for the cost of purchasing a first home for yourself, your spouse, your children, and/or your children’s descendants, then you can take a distribution from your Roth IRA without having to pay income taxes or the 10% Roth IRA early withdrawal penalty. However, this is limited to a lifetime total allowance of up to $10,000.

What does that mean?

It means you can do this four times for four different family members at $2,500 a pop. Or you can do it once for $10,000. Or you do innumerable other combinations that add up to $10,000. But once you hit that $10,000 mark, you can’t ever take advantage of this tax-free, penalty-free distribution again.

Penalty-Free Withdrawals

In addition to tax-free, penalty-free withdrawals, you can also take advantage of penalty-free withdrawals in certain instances.

However, since these are ONLY penalty-free distributions, your investment gains are still subject to income taxes if withdrawn.

Below is a list of five (5) qualifying events in which the Roth IRA early withdrawal penalty is waived.

1) Higher Education Expenses – You can withdraw funds from your Roth IRA early without penalty if you’re using the funds to pay for qualified higher education expenses for yourself, your spouse, your child, and/or any descendant of your child.

So what are “qualified higher education expenses”?

Tuition, fees, books, supplies, equipment, room and board, and some additional expenses at any eligible educational institution.

Repayment of student loans are not counted as “qualified higher education expenses,” so make sure to do your homework. If you have questions, IRS Publication 970 outlines the rules and regulations governing Tax Benefits for Education.

But remember, if you withdraw investment gains in addition to your original Roth IRA contributions, those investment gains are still subject to income taxes.

2) Substantially Equal Periodic Payments – If you receive a series of “substantially equal periodic payments” based on your current life expectancy, you can avoid paying the 10% Roth IRA early withdrawal penalty. However, any investment gains withdrawn are still subject to applicable income taxes.

3) Unreimbursed Medical Expenses – If you use the withdrawn funds to pay for unreimbursed medical expenses which exceed 7.5% of your adjusted gross income (AGI), then you can avoid paying the 10% Roth IRA early withdrawal penalty. However, any investment gains withdrawn are still subject to applicable income taxes.

4) Medical Insurance Premiums – If you use the withdrawn Roth IRA funds to pay for medical insurance premiums after receiving unemployment benefits for more than 12 weeks, you can avoid paying the 10% Roth IRA early withdrawal penalty. However, any investment gains withdrawn are still subject to applicable income taxes.

5) Payment of Back Taxes – The IRS allows you to withdraw funds from your Roth IRA early without paying the 10% early withdrawal penalty if those funds are used to pay off back taxes resulting from an IRS levy placed against you. However, any investment gains withdrawn are still subject to applicable income taxes.

Roth IRA Rules You Need To Know During Tax Filing Season, roth ira salary limit.

#Roth #ira #salary #limit


Roth IRA’s many fantastic features make it an ideal investment during tax season

Roth ira salary limit

You have until the April tax-return-filing deadline to set up an IRA for the 2016 tax year. You read that right.

And while it doesn t matter whether your contribution is to a traditional IRA or a Roth IRA, many taxpayers prefer the Roth. With a Roth account, you won t get an immediate tax break, but you won t pay any tax on your money when you eventually take it out.

The IRS, however, has specific rules on just who can have a Roth IRA and how much money can be contributed each year.

Income limits

The first Roth IRA eligibility consideration is income. You must earn money to open any IRA. If your only income is from unearned sources, such as investments, you cannot contribute to an IRA. You must get paid wages, a salary, tips, professional fees or bonuses.

And you can t put more money than you make in any IRA. So if your income is only $1,500, then $1,500 is the most you can contribute to a Roth.

There is an exception that allows Roth accounts for nonworking spouses. If you and your spouse file a joint return but one does not work, the employed spouse can open and contribute to a Roth IRA for the unemployed partner.

Generally, the contribution limits for a spousal IRA are the same as for the account held by the working wife or husband.

But if you make too much money, you re not eligible to open a Roth or to contribute to the account you opened when you were earning less. For a Roth, your earned income with some deductions you might have taken, such as for student loan interest, added back in must meet certain criteria.

Note that if a Roth doesn t work for you, you can contribute up to $250,000 in an FDIC-insured money market account.

No 2016 Roth if you make more than:

  • $194,000 if you re married filing jointly.
  • $132,000 if you file as single, head of household or married filing separately and did not live with your spouse during the year.
  • $10,000 if you lived with your spouse at any time during the tax year but decide to file separately.

If you ve already contributed to your Roth for the 2016 tax year and now want to contribute for 2017, this year s income limits are:

  • $196,000 for married joint filers.
  • $133,000 for single taxpayers.
  • $10,000 for married couples filing separately.

Even if you re not quite at the top of these pay ranges, your Roth contribution could be limited if your modified adjusted gross income falls within certain ranges.

  • $184,000 to $194,000 for married couples filing jointly in 2016; $186,000 to $196,000 for the 2017 tax year.
  • $117,000 to $132,000 for single or head-of-household taxpayers or married couples filing separately and who did not live with their spouse in 2016; $118,000 to $133,000 for 2017 filings.
  • $0 to $10,000 for married couples filing separately who lived together at any time during either the 2016 or 2017 tax year.

You still can add to your Roth in these cases, but not the full allowable amount. Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), contains worksheets and examples to help you determine your reduced Roth IRA contribution amount.

You can make much more generous contributions to a workplace retirement plan. Use Bankrate s 401(k), 457 and 403(b) deductions calculator to see the impact on your take-home pay.

Roth conversion taxes

Years ago you could not convert a traditional IRA to a Roth account if you made more than $100,000. Now, regardless of your earnings, you can turn your old retirement account into a Roth.

Such conversions, however, require you to pay taxes on any traditional IRA money on which taxes were deferred.

Those taxes must be paid by the time you file your return for the tax year in which the traditional IRA is converted to a Roth.

No age limits for Roth IRA

Finally, one of the more appealing Roth IRA rules is the lack of an age limit. While traditional IRA contributions are barred for individuals older than 70 1/2, you can be any age and still contribute to a Roth IRA if you re earning money.

And you can leave money in your Roth for as long as you live. The IRS doesn t require minimum distributions as it does with traditional IRAs. This makes the Roth IRA an ideal estate planning tool for leaving money to future generations.

Roth IRA – Get a Roth Started Today, taxes roth ira.#Taxes #roth #ira


Taxes roth ira

A Roth IRA is just one of the many investment accounts that make up the alphabet soup of abbreviations that create the landscape of financial retirement products. Roth was the Congressman who put through the legislation to establish these accounts. IRA stands for Individual Retirement Account, of which there are a handful of kinds, though basically they boil down to these two: 1. Traditional IRA and 2. Roth IRA. In a changing arena where individuals are having to captain their own financial ship to navigate through to retirement, it is important to know the nuances of the water ways.

For many former employees who are finding themselves in charge of their own shop, business, or contract life, the Roth will become one vehicle that many can successfully rely upon. Even individuals who have an employer may need the flexibility and freedom to make their own investing decisions and may choose to open Roth IRA in addition to other types of retirement accounts for this reason. It generally offers broader parameters, such as the ability to choose individual equities and mutual funds rather than canned and limited investment choices offered in employer-sponsored programs. Comfortably invest post-tax money into a Roth IRA for withdrawal later without the hefty withdrawal penalties that other individuals face when dealing with the Traditional IRA or a 401(k).

Know Qualified Distributions

Many who focus on employer-sponsored accounts or Traditional retirement accounts anticipate and make the financial assumption that their tax bracket will actually be lower as a retired person. While many people’s income (and taxation rate) does increase into their older working years, no one knows what the tax rate will be at their age of retirement. There could be an instance in which someone is at a higher tax bracket in retirement because they maximized retirement contributions while surviving on meager earnings during their working years.

A Roth IRA is built with post-tax money, which means tax issues are already settled prior to investing the funds. With the Roth, there is no tax on anything except actual earnings that accrue in addition to the initial investment in a Roth account. Tax-free distributions, called qualified distributions, occur in some cases, after five years of having the account in place. They can include rather unfortunate circumstances, such as your own death (and transfer of the funds to your beneficiaries), or your own disability. Happier reasons to receive qualified distributions can include reaching the right age (determined by the Federal rules) and for first-time home buyers.

Shop Wisely to Avoid Fees

Locate the banks or financial institutions that have the lowest administrative fees and trade fees. If you are going to deposit money into your Roth and leave investing up to the professionals, then transaction fees are a moot point. Fees for a Roth can be charged for trades and transactions based upon the dollar amount or number of shares that you are planning on buying or selling. Though, watch out mostly for the custodial fees on the Roth IRA available accounts.

Revisiting Alphabet Soup

The 401(k) is a retirement account larger companies offer to employees. An employee designates how much pre-tax income is invested on their behalf. Companies typically chip into their employees’ accounts, or match funds dollar-for-dollar up to a maximum annual amount. Investment funds are limited to the individual company’s 401(k) for employees. This can be disheartening for stock-picking stars, who will not necessarily be allowed to buy individual stocks, bonds, or mutual funds that they desire. If laid off, depending upon how long a company requires for employees to be vested, individuals may lose the match (or get to take most or all of it) to a Rollover IRA.

A Traditional IRA is popular with a 401(k) because it allows pre-tax pay to amalgamate retirement accounts. Retirement accounts limit how much money an individual can invest into retirement accounts. One way around this is to have separate accounts, such as a Traditional and also a Roth IRA. A Traditional IRA works a lot like the 401(k) because contributions are tax-deductible, occur pre-tax, and are taxed once withdrawals are made in retirement. Early withdrawal will incur taxes and withdrawal fees.

A Roth IRA can work well with other retirement accounts or fully on its own. It has advantages that are unique, such as applying post-tax money to invest in retirement. Enjoy investment flexibility if you are a strong individual investor. And, retain access to your money over your lifetime, especially if you have a qualified distribution circumstance arise.

Complex Investments Made Simple

Taxes roth ira

MyRA – my Retirement Account – Roth IRA #a #roth #ira


Summary of key Roth IRA features

A Roth IRA is an individual retirement arrangement (IRA) described in section 408A of the Internal Revenue Code. A my RA ® is a Roth IRA, so it is subject to the same rules that apply generally to Roth IRAs. Some of the key Roth IRA features are summarized below:

Basic tax attributes

Amounts can be withdrawn from a Roth IRA at any time, but special tax rules apply. Contributions (the amount you put in) to a Roth IRA are made after-tax and can be made at any time during the calendar year (or by the due date of the owner’s tax return for the year, not including extensions). Because contributions are after-tax, they will not be taxed again when they are distributed (taken out), and these non-taxable contributions will be treated as coming out of the Roth IRA before earnings which may be taxable depending on whether the distribution is qualified.

If a distribution is “qualified,” any earnings in the Roth IRA are not taxable when they are distributed. A distribution is “qualified” if it is made at least 5 years after the owner’s first contribution to the Roth IRA (counting from January 1 of the year of the first contribution), and the distribution is made:

  • after the owner is age 59½;
  • for a qualified first-time home purchase (up to $10,000 lifetime limit);
  • after the owner is disabled; or
  • to a beneficiary after the owner’s death or disability.

If a distribution is “not qualified,” any earnings in the Roth IRA are taxable. In addition, if the owner is under age 59½, a 10% additional income tax on any earnings will apply unless an exception is available, including exceptions for payments:

  • due to disability or after death;
  • paid at least annually in equal or close to equal amounts over your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary);
  • for qualified higher education expenses;
  • for health insurance premiums after the owner has received unemployment compensation for 12 consecutive weeks;
  • for a qualified first-time home purchase (up to $10,000 lifetime limit);
  • made directly to the government to satisfy a federal tax levy;
  • up to the amount of deductible medical expenses; or
  • that constitute a qualified reservist distribution, for a member of a reserve component called to duty for more than 179 days.

Eligibility for saver’s tax credit

Individuals who contribute to a Roth IRA with modified adjusted gross income (AGI) below certain levels for the year may be eligible to claim a saver’s tax credit for their contributions. The AGI eligibility levels for 2017 are:

  • $62,000 for married couples filing jointly,
  • $46,500 for heads of household, and
  • $31,000 for singles and married individuals filing separately

These modified AGI thresholds may be adjusted in later years to reflect cost-of-living increases.

Individuals must also be age 18 or older, not a full-time student, and not be claimed as a dependent on another tax return to be eligible for the Saver’s Tax Credit.

Eligible individuals can take the tax credit by filing Form 8880 with their tax return or working with a tax preparer. The chart below shows the amount of the saver’s credit for different kinds of filers for 2017:

Married Filing Jointly

Income Range

Annual contribution limits

There is an annual dollar limit on how much can be contributed to a Roth IRA (taking into account contributions to other Roth and traditional IRAs). For 2017, the limit is the lesser of $5,500 ($6,500 if age 50 or older by the end of the year), or an individual’s taxable compensation (including a spouse’s taxable compensation if a joint filer). Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. These annual dollar limits may be adjusted in later years to reflect cost-of-living increases.

Contribution limits based on income and filing status

Eligibility to contribute to a Roth IRA for a year may be limited depending on the owner’s (and spouse’s, if applicable) modified AGI for the year, and the owner’s tax-filing status. For 2017, the eligibility to contribute depending on filing status is as follows:

  • For single, head of household, or married filing separately (if did not live with spouse at any time during the year), eligibility begins to phase out (that is, the annual contribution limit begins to be reduced) at a modified AGI of $118,000, and completely phases out at $133,000.
  • For married filing jointly or qualifying widow(er), eligibility begins to phase out at a modified AGI of $186,000, and completely phases out at $196,000.
  • For married filing separately (if lived with spouse at any time during the year), eligibility begins to phase out at a modified AGI of $0, and completely phases out at $10,000.

These modified AGI thresholds may be adjusted in later years to reflect cost-of-living increases.

Avoiding excise tax on excess contributions

Generally, a 6% excise tax applies to any excess contribution to a Roth IRA. However, any contribution that is withdrawn on or before the due date (including extensions) for filing a tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contribution are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

No requirement to take distributions during owner’s lifetime

A Roth IRA owner is not required to take distributions from a Roth IRA at any age. Thus, the minimum distribution rules during an owner’s lifetime that apply to traditional IRAs when an owner reaches age 70½ do not apply to Roth IRAs.

Distributions after an owner’s death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. Distributions to beneficiaries follow the following rules:

  • Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.
  • If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary’s life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.
  • If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

my RA® is a registered trademark of the United States Department of the Treasury.

How to Roll Over a 401k into an IRA? #401k, #401k #rollover, #ira #rollover, #roth #ira, #traditional #iras


How to Roll Over a 401k into an IRA?

How to Roll Over a 401k into an IRA?

If you’re covered under a 401k plan at work, odds are you will do a 401k Rollover sometime during your working career. Why? Most people change jobs at least once during their working years. A lot people change jobs a number of times. Once you change jobs, you will be faced with the decision of doing a 401k rollover into an IRA. Or, you might have the decision made for you by your former employer. Rollovers are easy if you give some thought to setting up the right type of IRA, and doing the transfer correctly.

Why Roll Over Your 401k into an IRA?

There are two main reasons why you should roll your 401k balance when you leave an employer:

1. When you leave a company, and therefore no longer an active participant in the 401k, many plans state that you have to move your 401k plan somewhere else. They do this to save money. If you’re not an employee any more, why should they incur the administrative expense of having to track your 401k balance? While there are rules allowing you to keep to your balance in the plan, most companies do everything possible to encourage you to transfer your account elsewhere. If you join a new Company that has a 401k plan, you can move your balance into the new plan.

2. If your new company has no 401k plan, or if you simply want to, you can move your 401k assets into an IRA. The advantage of doing this is that an IRA gives you much more investment flexibility – you can invest in almost anything you want. In a 401k, you are limited to the funds offered by the plan sponsor.

The theory of income tax is pretty easy. If you earn money, it will be taxed, either now or later – but it will be taxed at some point. There are some loopholes, but in general, the theory holds true.

Regular 401k – Pre Tax

You may have a regular 401k at a former employer to which you contributed and your employer put in matching funds. This is considered a regular Pre-tax 401k plan that most people know about.

Employer Matching Contributions – Tax status is easy. Your employer adds money to your 401k on your behalf, and it doesn’t show up on your W-2. Since you haven’t been taxed on the money yet, you get hit with tax whenever you withdraw funds.

Your contributions – I always hear that people make “tax deductible contributions” to their 401k. This is technically wrong, though the thought is right. The amount you contribute to a 401k reduces the amount of salary shown on your W-2 each year. Since your salary is less, you pay less in income taxes. You don’t “deduct” the contribution from your taxes. The contributions reduce the amount of salary subject to tax – which is a bit different, but has the same general effect.

The bottom line is that your Regular 401k contributions have a tax status of Pre-Tax or “yet to be taxed dollars”. They have not been taxed, and will not be taxed until you withdraw money from the 401k. The IRS is very patient – they will wait for 30-40 years to get their tax cut of your money. But in the end, they always get their cut. Remember this point since it governs everything that happens in IRA rollovers or conversions.

Roth 401K

The Roth 401k is the new guy on the block. Starting in 2006, your employer was able to add a Roth option to your 401k plan. Essentially, you were/are given the option of electing how your contributions would be considered for tax purposes. You could continue to put in money, get a tax break and have your money taxed when you withdraw it (Regular 401k – Pre Tax). Or you make contributions after-tax, get no tax break, but have all money come out tax free when you retire (Roth 401k – After-Tax).

Again, remember the tax status of your contributions, either Pre-Tax Regular 401k or After-Tax Roth 401k contributions, as we move on to rolling over your account to an IRA.

What type of IRA Can I Open?

There are two types of IRA’s:

Traditional IRA – this is your normal IRA where you received a tax break on any money you put in, and get taxed when you take the money out at retirement. Tax status of money in a Traditional IRA is similar to a Regular 401k. Your contributions aren’t taxed until you withdraw the money.

Roth IRA – here you put in after-tax dollars, and when you retire, all withdrawals are received tax free. The tax status of your contributions is the same as in a Roth 401k – you put in after tax money and will get withdrawals tax free.

Why do I make a big deal of Tax Status? When you do a rollover of your 401k money into an IRA, the tax status needs to remain the same, unless you are willing to pay taxes as though you made a withdrawal.

If you want to make a tax free rollover:

• A regular Pre-Tax 401k must be rolled into a Traditional IRA
• An After-Tax Roth 401k must be rolled into a Roth IRA

These moves preserve the tax status of the money. Your regular 401k money and your Traditional IRA money will all be taxable when you eventually take the money out. Your Roth 401k money and your Roth IRA money has already been taxed and will eventually come out tax free.

You might have heard about Roth IRA conversions, in which people roll their money form a Regular 401k or a Traditional IRA into a Roth IRA. This is done to change the tax status of money and involves paying income taxes now, at the time of conversion. There are good reasons for doing this, and the subject is discussed in What is a Roth IRA Conversion and How Does it Work?

In this article, I am assuming you want to move your 401k into an IRA and not pay any income taxes until you retire or withdraw your money later on.

How to Move Your 401k into an IRA without it Being Taxable

It’s pretty easy to rollover your 401k into an IRA.

• When you open an IRA account, whether you choose a Roth or Traditional depends upon the tax status of your 401k money. So if you are in a Regular 401k, open a Traditional IRA. If you are in a Roth 401k, open a Roth IRA.

If you are moving Cash from the 401k, you can open the IRA anywhere you want – bank (for a savings account or CDs), Brokerage Firm (if you want to invest in securities), or Mutual Fund Company (to invest in funds).

If you are moving company stock from your 401k, you need to open the IRA at a Brokerage Firm who can accept securities. Read: Choosing the Right Manager for Roth or Traditional IRA Investments

• Fill out the forms at your former employer telling them to move the assets directly into your new IRA.

*** Do NOT have your employer cut you a check so that you can deposit it into the new IRA. Have it sent directly to your IRA account. ***

If your employer makes the check out to you, they are obligated to withhold 20% of the amount, and submit this to the IRS. You would get the money refunded when your income taxes are filed for the year. However, the IRA Withdrawal Rules are strict, and say that IRA funds must be deposited within 60 days or you will have a penalty of 10% plus whatever other taxes are due. So, you will have to make up for the 20% out of your own pocket to fully fund the new IRA within 60 days. If you don’t have this large amount lying around in a savings account, you will be penalized 10% on the 20% that went to the IRS as though you had withdrawn the money early.

So, be sure to tell your former employer to move your 401k assets directly to your new IRA provider so that no tax withholding is necessary. This will prevent the above problem.

If your former employer refuses to make a direct transfer, and will only cut you a check, tell the employer to make out the check to your new IRA provider with the notation “investment for John Doe 401k rollover…” This will stop you from being able to deposit the check in your checking account. Simply send the check to your new IRA provider since it is made out to them.

• Check with your new IRA provider that the funds were received and put in the correct account. Money does get side tracked sometimes, and you don’t want to find out in 6 months that the money never arrived.

A 401k Rollover is easy if…

As you can see, the process is very easy. Your new IRA provider will handle most of the transfer aspects. Your former employer will be glad to get rid of your account.

The process is easy IF you put in the necessary thought before the transfer .Ensure the rollover is going in an account with the same tax status. Make sure you don’t get your hands on the money during the process. Confirm the money ended up in the right place.

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Roth IRA #roth #ira #rate


Roth IRA


Similar to other individual retirement plan accounts, the money invested within the Roth IRA grows tax free. Other defining characteristics of a Roth:

  • Contributions can continue to be made once the taxpayer is past the age of 70½, as long as he or she has earned income .
  • The taxpayer can maintain the Roth IRA indefinitely; there is no required minimum distribution (RMD) .
  • Eligibility for a Roth account depends on income.

Establishing a Roth IRA

A Roth IRA must be established with an institution that has received IRS approval to offer IRAs. These include banks, brokerage companies, federally insured credit unions and savings loan associations.

A Roth IRA can be established at any time. However, contributions for a tax year must be made by the IRA owner’s tax-filing deadline, which is generally April 15 of the following year. Tax-filing extensions do not apply.

There are two basic documents that must be provided to the IRA owner when an IRA is established:

These provide an explanation of the rules and regulations under which the Roth IRA must operate, and establish an agreement between the IRA owner and the IRA custodians/trustee.

IRAs fall under a different insurance category than conventional deposit accounts. Therefore, coverage for IRA accounts is less. The Federal Deposit Insurance Corporation (FDIC) still offers insurance protection up to $250,000 for traditional or Roth IRA accounts, but account balances are combined rather than viewed individually. For example, if the same banking customer has a certificate of deposit held within a traditional IRA with a value of $200,000 and a Roth IRA held in a savings account with a value of $100,000 at the same institution, the account holder has $50,000 of vulnerable assets without FDIC coverage.

Not all financial institutions are created equal. Some IRA providers have an expansive list of investment options, while others are more restrictive. Almost every institution has a different fee structure for your Roth IRA, which can have a significant impact on your investment returns.

Your risk tolerance and investment preferences are going to play a role in choosing a Roth IRA provider. If you plan on being an active investor and making lots of trades, you want to find a provider that has lower trading costs. Certain providers even charge you an account inactivity fee if you leave your investments alone for too long. Some providers have more diverse stock or exchange-traded fund offerings than others; it all depends on the type of investments you want in your account.

Pay attention to the specific account requirements as well. Some providers have higher minimum account balances than others. If you plan on banking with the same institution, see if your Roth IRA account comes with additional banking products.

Compensation Defined

For individuals working for an employer, compensation that is eligible to fund a Roth IRA includes wages, salaries, commissions, bonuses and other amounts paid to the individual for services the individual performs for an employer. At a high level, eligible compensation is any amount shown in Box 1 of the individual’s Form W-2 .

For a self-employed individual or a partner in a partnership, compensation is the individual’s net earnings from his or her business, less any deduction allowed for contributions made to retirement plans on the individual’s behalf, and further reduced by 50% of the individual’s self-employment taxes.

Other compensation eligible for the purposes of making a regular contribution to a Roth IRA includes taxable amounts received by the individual as a result of a divorce decree.

The following sources of income are not eligible compensation for the purposes of making contributions to a Roth IRA:

  • rental income or other profits from property maintenance
  • interest and dividends
  • other amounts generally excluded from taxable income

Contributing to a Roth IRA

In 2016, an individual may make an annual contribution of up to $5,500 to a Roth IRA.

Individuals who are age 50 and older by the end of the year for which the contribution applies can make additional catch-up contributions (up to $1,000 in 2016). For instance, an individual who is under age 50 may contribute up to $5,500 for tax year 2016, but an individual who reached age 50 by year-end 2016 may contribute up to $6,500.

All regular Roth IRA contributions must be made in cash (which includes checks); regular Roth IRA contributions cannot be made in the form of securities. However, a variety of investment options exist within a Roth IRA, once the funds are contributed, including mutual funds. stocks, bonds, ETFs. CDs and money market funds .

A Roth IRA can be funded from several sources:

The Spousal Roth IRA

An individual may establish and fund a Roth IRA on behalf of his/her spouse who makes little or no income. Spousal Roth IRA contributions are subject to the same rules and limits as that of regular Roth IRA contributions. The spousal Roth IRA must be held separately from the Roth IRA of the individual making the contribution, as Roth IRAs cannot be held as joint accounts.

In order for an individual to be eligible to make a spousal Roth IRA contribution, the following requirements must be met:

  • The couple must be married and file a joint tax return
  • The individual making the spousal Roth IRA contribution must have eligible compensation
  • The total contribution for both spouses must not exceed the taxable compensation reported on their joint tax return
  • Contributions to one Roth IRA cannot exceed the contribution limits

Eligibility Requirements

Anyone who has taxable income can contribute to a Roth IRA – as long as he or she meets certain requirements concerning filing status and modified adjusted gross income (MAGI). Those whose annual income is above a certain amount, which the IRS adjusts periodically, become ineligible to contribute.

For 2016, the income maximums are:

  • $194,000 for individuals who are married and file a joint tax return
  • $10,000 for individuals who are married, lived with their spouses at anytime during the year and file a separate tax return
  • $132,000 for individuals who file as single, head of household, or married filing separately and did not live with their spouses at any time during the year

The IRS sets income limits that reduce or “phase out” the amount of money one is allowed to contribute. Here is a chart outlining the ranges for each tax-filing category in 2016:

Income Range for 2016

Married and filing a joint tax return

Know The Rules For Roth 401(k) Rollovers #rollover #into #roth #ira


Know The Rules For Roth 401(k) Rollovers

During turbulent financial times, when layoffs are rampant, it is important to have a sound financial plan to weather the uncertainties. It is equally important to be aware of what your options are with regard to your employer-sponsored retirement plan in the event you are let go. The rollover options for 401(k) accounts are probably well known by now, but this may not be the case for Roth 401(k) accounts. If your job is at stake or you’re considering a career move, read on for a look at options for handling your Roth 401(k) account. (For background reading, see A Closer Look At The Roth 401(k) .)

Roth Contributions and Gross Income
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided for designated Roth contributions that new or existing 401(k) and 403(b) plans can accept. This new feature became effective for years beginning on or after January 1, 2006. Unlike deferrals to traditional 401(k) accounts, the deferrals to a Roth 401(k) are on an after-tax basis. In other words, the amount of the Roth contribution is included in an individual’s gross income and therefore taxed on the amount being deferred as if the individual had actually received the money.

The rollover options for a Roth 401(k) follow those of a traditional 401(k). That is, you can roll the funds over to an IRA or into a new employer’s 401(k). Just like the distribution of a traditional 401(k) is moved into a traditional IRA, the distribution from a Roth 401(k) rolled into a Roth IRA. If your new employer has a Roth 401(k) option and allows for transfers, you may also be able to roll the “old” Roth 401(k) into the “new” Roth 401(k).

The best way to accomplish either rollover is from trustee to trustee. This ensures a seamless transaction that will not be challenged later by the IRS as to whether it was made for the full amount or in a timely manner. If, however, you do decide to have the funds sent to you instead of directly to the new trustee, you can still roll over the entire distribution to a Roth IRA within 60 days of receipt. If you choose this route, however, the payer is generally required to withhold 20%.

Distributions Issues
What happens, though, when you want to take distributions from either the new Roth 401(k) or the Roth IRA that houses the rollover funds? As far as distributions from the new Roth 401(k), that depends on the plan itself; your new employer’s human resources department should be able to assist with that.

Roth IRA contributions can be withdrawn at any time tax-free and penalty-free regardless of age. However, the rules for distributions of earnings vary. As you may already know, a qualified distribution from a Roth IRA is one that is made after the five-year rule is met and after age 59.5, after death, as a result of disability or for a first home purchase (limits apply). These qualified distributions are both tax and penalty free. Nonqualified distributions subject to income taxes are distributions of earnings that do not meet the five-year holding rule but are made after the age of 59.5, due to disability, death or for a “life event”. Nonqualified distributions subject to both income taxes and penalties are distributions of earnings in which the five-year rule are not met and the individual is not at least 59.5, disabled, deceased or experiencing a “life event”. This may sound relatively simple but the five-year rule can be tricky. (For more insight, read Asset Distributions A Key Consideration For Retirees .)

If you decide to roll over the funds from your old Roth 401(k) to your new Roth 401(k) by trustee-to-trustee transfer (also called a direct rollover ), the number of years the funds were in the old plan can count toward the five-year period for qualified distributions. However, the previous employer must contact the new employer about the amount of employee contributions and the first year they were made. (For other considerations, see How After-Tax Rollovers Affect Your IRA .)

If an employee did only a partial rollover to the new Roth 401(k), additional reporting would be necessary by the new Roth 401(k) and the five-year period starts again. That is, you do not get credit for the amount of time the funds were in your old Roth 401(k).

From Roth 401(k) to IRA
If the rollover is to a Roth IRA instead, the holding period within the Roth 401(k) does not carry over. That is, if the client has an existing Roth IRA, once the Roth 401(k) distribution is in the account, it has the same holding period as the Roth IRA funds. For example, let’s assume that the Roth IRA was opened in 2000. You worked at your employer from 2006-2009 and were then let go or quit. Because the Roth IRA that you are rolling the funds into has been in existence for more than five years, the full distribution rolled into the Roth IRA meets the five-year rule for qualified distributions. On the other hand, if you did not have an existing Roth IRA and had to establish one for purposes of the rollover, the five-year period begins the year the Roth IRA was opened, regardless of how long you have been contributing to the Roth 401(k).

Rolling over a Roth 401(k) into a Roth IRA is usually the optimal thing to do particularly because the options within an IRA are typically significantly greater and better than within a 401(k) plan. Although it is usually not advisable to tap retirement funds, in desperate times the unthinkable may become the only option. The need for these retirement funds should be considered prior to rolling the money into an IRA, particularly if there is not one already in place, as this would begin the five-year holding period anew. Before making a decision, speak to your tax or financial advisor about what may be best for you.