Whether you're just thinking about an IRA or are ready to roll over, help is here with our frequently asked questions.
Traditional IRA Questions
Roth IRA Questions
Roth Conversion Questions
Traditional IRA Questions
What does IRA stand for?
IRA stands for Individual Retirement Account. These accounts are often used for retirement planning purposes because of their, tax deferred features. IRAs are an individual retirement vehicle meaning the individual has the ability to manage his/her investments, or can work with a third party for investment management.
How much can I contribute to my traditional IRA?
The maximum contribution amount for a traditional or Roth IRA in 2010 is $5,000 (with a $1,000 catch-up contribution for those age 50+). Sign up for reminders on contribution dates and limits
When can I start withdrawing from my traditional IRA?
Traditional IRA wicthdrawals may begin penalty-free at age 59½ and are mandatory by 70½. If you withdraw any funds prior to age 59½ you may incur a 10% penalty along with normal income tax. In other words, withdrawals made prior to age 59-1/2 are included as taxable income in the year of distribution and taxed at the current federal income tax rates.
Can I contribute to both a Roth and a traditional IRA for the same year?
If you meet contribution eligibility requirements for both Roth and traditional IRAs, you may contribute to both for the same year. However, the contributions made between the two IRAs, in aggregate, cannot exceed the contribution limit.
Roth IRA Questions
How does a Roth IRA work?
Similar to a traditional IRA, a Roth IRA is a non-qualified, tax deferred account vehicle. However, there are several important differences—number one being that in a Roth IRA your accumulated earnings are generally not taxed upon distribution. What this means for you is when you withdraw your money at retirement age you may not be taxed on your earnings. In addition, you can withdraw your principal contributions at any time tax-free, without penalty.
However, in some cases there may be a penalty if you withdraw your earnings prior to age 59½ or before your money has been in the Roth for at least five years, with exceptions for first time home buyers and education purposes, among other things.*
Consult a qualified tax professional for specific guidance. Learn more about the new 2010 conversion rules for Roth IRAs!
*A distribution from a Roth IRA is considered a qualified distribution if it was withdrawn after satisfying a five-year requirement provided that you are (i) age 59½ or older; (ii) disabled, (iii) qualified for a special purpose distribution such as the purchase of a first home, or (iv) become deceased
How much can I contribute to my Roth IRA?
The maximum contribution amount for a traditional or Roth IRA in 2010 is $5,000 (with a $1,000 catch-up contribution for those 50+ in age). Sign up for reminders on contribution dates and limits
Roth IRA Withdrawals- when can I start withdrawing?
Roth IRA withdrawals may begin penalty-free at age 59½. There is no required distribution limit. However, there is a penalty if you withdraw your earnings prior to age 59½ or before your money has been in the Roth for at least five years. The IRS provides limited exceptions for first time home buyers and education purposes, among other things.*
*distribution from a Roth IRA is considered a qualified distribution if it was withdrawn after satisfying a five-year requirement provided that you are (i) age 59½ or older; (ii) disabled, (iii) qualified for a special purpose distribution such as the purchase of a first home, or (iv) become deceased.
When do I pay taxes on a Roth IRA conversion?
IRA owners and plan participants who convert in 2010 will have the option of spreading the taxable conversion amount over a two year period (2011 and 2012), or including the entire amount as income in 2010. Compared to a traditional IRA, your earnings (or gains) are generally not taxed upon distribution in a Roth. What this means for you is when you withdraw your money at retirement age, you won't be taxed on your distributions.
Consult a qualified tax professional for specific guidance. Learn more about the new 2010 conversion rules for Roth IRAs!
Can I contribute to multiple Roth IRAs?
If you have more than one Roth IRA, the contribution limit applies to the total amount of contributions you make to all of your Roth IRAs for the year. Annual contributions to all IRA accounts—Roth or traditional—may not exceed individual limits in aggregate.
Am I eligible for a Roth IRA catch-up contribution?
If you are age 50 or older before the close of the taxable year and are otherwise eligible to make a Roth IRA contribution, you may increase your contribution amount by $1,000 for 2010 and later years.
Am I required to take required minimum distributions (RMDs) from my Roth IRA?
No. Distributions are not required from your Roth IRA during your lifetime or during the lifetime of a spouse beneficiary who treats the Roth IRA as his/her own after your death. However, when you die, your non-spouse beneficiary(ies) and a spouse beneficiary who does not treat the Roth IRA as his/her own must take minimum distributions.
I have heard that I cannot withdraw my Roth IRA assets until the account has been opened for five years. Is this true?
No. Roth IRA assets belong to the Roth IRA owner and may be withdrawn at any time, for any reason. Although there is a widely held notion that Roth IRA assets are not accessible until the Roth IRA has been open for five years, this notion is false. On the same token, certain withdrawals (but not all) taken within five years of when you establish your first Roth IRA may be subject to taxes and penalties.
May Roth IRA assets be rolled over to an employer sponsored retirement plan?
No. Distributions from your Roth IRA are not eligible for rollover to an employer-sponsored retirement plan.
What happens to my Roth IRA when I die?
Any amounts remaining in your Roth IRA at your death will be paid to your beneficiary(ies).
How quickly must my beneficiary(ies) withdraw my Roth IRA assets?
Although your Roth IRA plan documents may specify how quickly your beneficiary(ies) must take distributions from your Roth IRA, when you die, your beneficiary(ies) retain(s) the option to deplete your Roth IRA by the end of the fifth calendar year following your death or to receive payments each year based on the beneficiary’s life expectancy.
Your Roth IRA must be distributed by the end of the fifth calendar year following your death, if your beneficiary is not an individual (e.g., a charity, your estate, etc.).
To determine the beneficiary distribution options available to your beneficiary(ies), contact your IRA trustee/custodian or your financial advisor.
Can my beneficiary(ies) move my Roth IRA into a Roth IRA of his/her own?
A spouse beneficiary may move your Roth IRA into a Roth IRA of his/her own. Options for moving your Roth IRA to your spouse’s own Roth IRA may include a transfer, rollover or redesignation of the Roth IRA.
A non-spouse beneficiary cannot move your Roth IRA into a Roth IRA of his/her own.
Does the five-year waiting period for qualified distributions re-set for beneficiaries when the Roth IRA owner dies?
No. When your beneficiary inherits your Roth assets, your beneficiary also inherits your five-year waiting period as it relates to qualified distributions from that inherited Roth IRA. In other words, the five-year waiting period is determined independently of the five-year period for the beneficiary’s own Roth IRAs.
However, if your surviving spouse treats the inherited Roth IRA as his or her own, the five-year period for qualified distributions with respect to any of your surviving spouse’s Roth IRAs (including the one that your surviving spouse treats as his or her own) ends with your Roth IRA’s five-year period, or the five-year period applicable to your spouse’s own Roth IRA, whichever is earlier.
What if my beneficiary(ies) fails to take a required distribution?
If your beneficiary(ies) fails to withdraw the required amount in any tax year, he or she may be subject to a 50 percent excess accumulation penalty tax on the amount that should have been withdrawn, but was not distributed
What is the difference between an IRA-to-IRA rollover and an IRA-to-IRA transfer?
An IRA-to-IRA rollover is when you withdraw all or part of the amounts in your Roth IRA and then reinvest those amounts within 60 days into the same or another Roth IRA. There are, however, restrictions on IRA-to-IRA rollovers. You may only roll over one distribution from each Roth IRA every 12 months. There is also a 12-month waiting period before you can make a tax-free rollover of any amount distributed from the IRA into which you made the tax-free rollover. The 12-month waiting period begins on the date you receive the Roth IRA distribution, not on the date you roll it over into a Roth IRA.
Alternatively, you may move your Roth IRA from one custodian/trustee to a Roth IRA maintained by another custodian/trustee by requesting a direct transfer. Federal law does not limit the number of transfers you may make during any year.
What if I need to withdraw some or all of my Roth IRA savings during retirement?
While the advantages of the Roth IRA and a Roth IRA conversion are enhanced the longer your assets remain in a tax favored status, Roth IRA savings remain available to you for distribution should you choose to take withdrawal of some or all of your savings during retirement, subject to applicable penalties and limitations.
Are Roth IRA distributions subject to taxation?
If you take a qualified distribution from your Roth IRA, distributions are exempt from federal taxation. If your Roth IRA distributions are non-qualified distributions, certain taxes and penalties may apply. Due to the complexity of the Roth IRA distribution rules and tax ramifications, you should consult a tax advisor prior to taking distributions from your Roth IRA.
What is a Roth IRA qualified distribution?
A qualified distribution from your Roth IRA is not subject to federal income tax. A distribution from a Roth IRA is considered a qualified distribution if it was withdrawn after satisfying a five-year requirement provided that you are (i) age 59½ or older; (ii) disabled, (iii) qualified for a special purpose distribution such as the purchase of a first home, or (iv) become deceased.
Roth Conversion Questions
Can I convert my traditional IRA to a Roth IRA?
Previously, in 2009 if your modified adjusted gross income is more than $100,000 you cannot convert from your traditional IRA to a Roth IRA. Now in 2010 there is no income limit for conversions. Keep in mind that you may be taxed on your deductible contributions and earnings. Consult a qualified tax professional for specific guidance. Learn more about the new 2010 conversion rules for Roth IRAs!
How do I convert (rollover) my 401(k) plan to a Roth IRA?
Assets from your 401(k) plan or any other qualifying employer retirement plan (e.g., profit sharing plans, governmental 457(b) plans, 403(b) arrangements, and 403(a) arrangements) may be converted to a Roth IRA either directly or indirectly.
To complete a direct conversion, you instruct the plan administrator of your 401(k) plan to send the distribution to your Roth IRA custodian/trustee.
To complete an indirect conversion, you request the plan administrator to distribute your plan balance to you. You then have 60 days from the date you receive the distribution to complete the transaction. When you receive a distribution, the plan administrator is required to withhold 20 percent of the eligible rollover distribution for federal income tax withholding purposes. If you chose the indirect rollover method to complete your Roth conversion, you may make-up the 20 percent withheld amount out-of-pocket and convert the full amount.
Is there a limit to the number of Roth IRA conversions that I can do within a 12-month period or some other period of time?
There is no limit to the number of Roth IRA conversions that can be completed.
Is there a difference between a Rollover and Transfer IRA
Yes. In a Transfer IRA you would move your assets directly from one custodian to another custodian without taking receipt of the funds. In a Rollover IRA you may take receipt of your assets for up to 60 days before reinvesting the money in a new retirement plan or traditional IRA. Rollover now
What options do I have if I change my mind after completing a Roth IRA conversion?
If you change your mind after completing a Roth IRA conversion, within a limited period of time, you may elect to “recharacterize” all or a portion of an amount that you converted. When you elect to recharacterize, you redeposit the converted assets into a traditional IRA and, if the entire conversion amount is re-characterized, it will nullify any of the tax consequences of the initial conversion transaction.
How do I re-characterize a conversion?
You must initiate the recharacterization with your Roth IRA custodian/trustee by making an irrevocable election to recharacterize. The conversion amount that you recharacterize along with any gain or loss attributable to that amount will be directly transferred to your traditional IRA.
What does it mean to re-characterize a Roth IRA conversion?
Under federal law, taxpayers have the option of “undoing” a Roth IRA conversion transaction by doing a recharacterization. When you recharacterize a Roth IRA conversion transaction, you’re essentially electing to put things back to the way they were prior to the conversion. However, if your entire Roth IRA balance is not being moved to the traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of this action.
What are the tax consequences of re-characterizing a conversion?
There are no tax or penalty implications associated with recharacterization itself. For tax purposes, when you recharacterize a conversion contribution the amount recharacterized is treated as if it had never been converted. However, if your entire Roth IRA balance is not being moved to the traditional IRA as part of the recharacterization, consult your tax advisor prior to recharacterizing for possible ramifications of this action.
What is the deadline for re-characterizing a conversion?
The deadline for completing a recharacterization is your tax return due date (including any extensions) for the year for which the conversion/contribution was made to the first IRA. However, if you filed your federal income taxes timely, you have up to six months after your income tax filing deadline to recharacterize. For example, if you converted to a Roth IRA in 2010 and filed your 2010 federal income tax return on time (i.e., by April 15, 2011), you have until October 15, 2011 to recharacterize your 2010 conversion.
Can I recharacterize a portion of my conversion contribution?
Yes. All or a portion of a conversion contribution may be recharacterized. However, it is important to recognize that the net income attributable (NIA) that must accompany the recharacterized portion is calculated as a pro rata portion of the aggregate income earned on the entire Roth IRA during the period the IRA held the contribution.
Can I reconvert assets that I have previously converted and recharacterized?
Yes. You may reconvert assets that have been previously converted and recharacterized. However, a reconversion must occur in a subsequent year to the prior conversion, or if later, after 30 days have elapsed since the recharacterization.
Do tax rates have to go up significantly for me to benefit from a Roth IRA conversion?
No. While the potential benefits of a Roth IRA conversion vary significantly depending on each individual’s circumstances, in many cases a Roth IRA conversion can yield significant benefits even without anticipating a significant increase in future tax rates. This is especially true for individuals who have non-IRA resources available for paying the taxes on a Roth IRA conversion.
Is there any benefit of a Roth IRA conversion if tax rates stay the same (or actually go down) in the future?
While one of the key advantages of a Roth IRA conversion is its ability to help you hedge against future tax increases, this is not the only potential benefit of a Roth IRA conversion. For example, unlike traditional IRA savings, Roth IRA savings are not subject to mandatory distributions beginning at age 70½ and, therefore, can provide valuable extended tax shelter if you are hoping to pass some or all or your retirement savings on to your heirs.
How can a Roth IRA conversion potentially help me provide a greater financial legacy to my heirs?
When you convert retirement savings to a Roth IRA, you pay taxes in the year of conversion based on the current federal income tax rates. Once converted to a Roth IRA, future earnings generally accrue on a tax-free basis (versus a tax-deferred basis as with traditional IRA savings).
What’s more, unlike traditional IRA savings, Roth IRA savings are not subject to mandatory distributions at age 70½. Because Roth IRA assets are not subject to mandatory distributions during your lifetime, the Roth IRA allows you to extend the tax-sheltered life of your retirement savings, which can potentially result in a greater financial legacy for your heirs.
May I convert my required minimum distribution (RMD) from my existing plan to a Roth IRA?
No, required minimum distributions (RMDs) may not be converted. However, once your required minimum distribution is withdrawn, you may generally convert all or a portion of the remaining plan balance provided you meet the basic eligibility criteria for converting.
I have a variety of stocks and mutual funds in my traditional IRA. Do I have to liquidate these assets prior to converting to a Roth IRA?
No. As long as the Roth IRA custodian/trustee is able to hold the type of assets you have in your traditional IRA, there is no need to liquidate your traditional IRA investments when converting to a Roth IRA.
What is the deadline for completing a 2010 Roth IRA conversion if I want to take advantage of the opportunity to pay the taxes over two years (i.e., 2011 and 2012)?
If you want to take advantage of the special two-year conversion taxation, the conversion amount must be distributed from the IRA or eligible retirement plan on or before December 31, 2010. Be sure to check with your IRA custodian/trustee or plan administrator to see if earlier deadlines apply. Many IRA custodians/trustees and plan administrators set earlier deadlines so that there is adequate time to process conversions by year end.
If I convert in 2010 and choose to pay the taxes in 2011 and 2012, may I take a distribution of those assets before 2012?
If you take a distribution of assets you converted in 2010 before 2012 and had elected to pay the taxes in 2011 and 2012, the amount subject to taxation for the year of the distribution will be increased by the amount of the distribution received. In other words, the contribution taxation is accelerated. For example, if you convert your $50,000 traditional IRA to a Roth IRA in March 2010 and choose to pay the taxes over the two years (2011 and 2012), $25,000 is includible in income for both 2011 and 2012. However, if you take a $5,000 distribution of the converted assets from your Roth IRA in 2010, $5,000 will be includible in income for 2010. Assuming you take no other distributions of these converted assets before 2012, $25,000 will be includible in income for 2011 and $20,000 ($25,000 - $5,000) will be includible in income for 2012.
Note: You will also pay a 10 percent penalty on the $5,000 distribution for 2010 unless you meet an early distribution penalty exception.
When I convert to a Roth IRA, does the 10 percent early distribution penalty tax apply to the amount that I have withheld for federal income taxes?
Potentially, yes. While the 10 percent early distribution penalty tax does not apply to the assets that are converted to a Roth IRA, the early distribution penalty does apply to other distributions (including amounts withheld for federal income taxes) when the owner is not yet age 59½ and does not meet another penalty exception.
If I am under age 59½, what are the penalty exceptions that would allow me to avoid the 10 percent early distribution penalty tax on the nonqualified distribution of conversion assets or Roth IRA earnings?
The 10 percent penalty tax on early distributions does not apply to distributions made to you before you attain age 59½ if any of the following reasons apply:
- You have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income and provided certain other conditions apply.
- The distribution is to pay your medical insurance premiums if you are unemployed and receive federal or state unemployment benefits for 12 consecutive weeks, or would have if not self-employed, and you receive the distribution during that or the succeeding tax year.
- A physician certifies that you are disabled as defined by the Internal Revenue Code.
- The distribution, of up to a $10,000 lifetime limit, is used within 120 days of withdrawal to buy or build a home that will be a principal residence for a qualified first-time homebuyer
- The distributions are not more than your or your spouse’s expenses, or those of your or your spouse’s child or grandchild, for attendance at a post-secondary education institution.
- You are receiving substantially equal periodic payments consistent with the Internal Revenue Code and Regulations.
- The distribution is due to an IRS levy on the Roth IRA.
- The distribution is a “qualified reservist distribution” as defined by the Internal Revenue Code
The information provided above is intended to be used solely for informational purposes, and does not constitute tax advice. Please consult with a qualified tax professional before making any decisions regarding potentially taxable events.
