Dec 18

In What Order Do Roth IRA Distributions Come Out of the Account

In general, you cannot pick and choose the origin of each distribution you take. For example, if you take a distribution before the five-year holding period is up, you would want to take your contributions first, because they are not subject to tax or penalties. However, the ordering rules for determining Roth distributions are quite taxpayer favorable. Roth distributions are deemed to come out in the following order:

  • Regular Roth IRA contributions are distributed first
  • Next, converted amounts, starting with the amounts first converted
  • Earnings come out last

These ordering rules can significant impact the tax treatment of the distributions. For example, if you take a distribution before the five-year holding period is up of if you fail to satisfy the other requirements of a qualified distribution, the withdrawal still won’t be subject to the early distribution tax as long as you have taken less than the total amount of all contributions you have made to your Roth IRAs. Note that for purposes of these ordering rules, all Roth IRAs are considered a single Roth IRA.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Jul 05

What Are the Rules for Rolling Over a Roth IRA?

The contribution limitation does not apply to a “qualified rollover contribution,” but no rollover contribution other than a qualified rollover contribution is permitted. The term “qualified rollover contribution” includes only the following:

  • A rollover contribution from another Roth IRA.
  • A rollover contribution from a traditional IRA that satisfies the requirements for a rollover from one traditional IRA to another.
  • A rollover contribution from a qualified pension, profit-sharing, stock bonus, or annuity plan (qualified plan), tax-deferred annuity, or eligible deferred compensation plan that satisfies the requirements for rollovers from the particular type of plan.
  • A contribution to a Roth IRA by an individual who has received a military death gratuity.

A qualified rollover must satisfy all of the requirements for rollovers of and into IRAs generally, which means, for example, that a rollover contribution must made within 60 days of the rolled-over distribution and the rollover privilege is denied to beneficiaries of IRA owners (other than surviving spouses). For years beginning before 2010, an individual may not make a qualified rollover from a traditional IRA, qualified plan, tax-deferred annuity, or eligible deferred compensation plan to a Roth IRA for his or her benefit if his or her adjusted gross income for the year exceeds $100,000.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Jun 16

How Does a Roth IRA Contribution Work?

Assume individual Jane decides to set aside $1,000 of her pretax income for an IRA contribution. She could contribute the entire $1,000 to a traditional IRA because the deduction for the contribution would effectively eliminate any current tax on the $1,000. Since a contribution to a Roth IRA is not deductible, she could contribute to a Roth IRA only the amount remaining after paying tax on the $1,000. Assume T is, at all times, taxed at a flat 30 percent. She could therefore make a Roth IRA contribution of $700 ($1,000 less 30 percent thereof).

For 2017, the maximum you can contribute to a Roth IRA is $5,500, or $6,500 if you are age 50 or older.

How Does a Roth IRA Contribution Work?

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Mar 30

Do You Have to File a Form with the IRS if You Received Distributions from Your Roth IRA?

Yes. In general, File Form 8606 if you received distributions from a Roth IRA.
Use Form 8606, Nondeductible IRAs, to report:

Do You Have to File a Form with the IRS if You Received Distributions from Your Roth IRA?

  • Nondeductible contributions you made to traditional IRAs,
  • Distributions from traditional, SEP, or SIMPLE IRAs, if you have ever made nondeductible contributions to traditional IRAs,
  • Distributions from Roth IRAs, and
  • Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Feb 01

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

Generally, distributions from a designated Roth account are excluded from gross income if they are (1) made after the employee attains age 59 1/2 , (2) “attributable to” the employee being “disabled,” or (3) made to the employee’s beneficiary or estate after the employee’s death. However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or, if the account contains a rollover from another designated Roth account, to the other account.

Is There Any Holding Period Requirement Before Taking Tax-Free Distributions from a Roth IRA?

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Jan 03

There’s Still Time to Cut Your 2016 Tax Bill

Although we’ve rung in a new year, there’s still time to cut your taxes for 2016.  If you already have an individual retirement account (IRA), you have until Tax Day to make contributions.  Contributions made to a traditional plan are usually tax-deductible, though there are income limits if your employer offers a retirement plan, such as a 401(k).  Although Roth plans are not tax-deductible, there’s still huge benefits to max out your 2016 plan, including tax-free withdrawals come retirement.

What are the maximum contribution limits?

The maximum contribution limit for an IRA for 2016 (and 2017) is $5,500 or $6,500 if you’re age 50 or older, or your taxable compensation for the year, if less. Contributions to a Roth IRA may be limited based on your filing status and income.

There's Still Time to Cut Your 2016 Tax BillIs my IRA contribution deductible on my tax return?

If neither you nor your spouse is covered by an employer retirement plan, such as a 401(k), your deduction is allowed in full.

For contributions to a traditional IRA, the amount you can deduct may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. In the case of a Roth IRA, contributions aren’t deductible.

Can I contribute to a traditional or Roth IRA if I’m covered by a retirement plan at work?

Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan). If you or your spouse is covered by an employer-sponsored retirement plan, such as a 401(k) plan and your income exceeds certain levels, you may not be able to deduct your entire contribution.

Can I establish an IRA if only one spouse has earned income for the year?

Yes. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return and cannot exceed the maximum IRA contributions for the year (for 2017 $5500 or $6500 if over the age of 50). It doesn’t matter which spouse earned the compensation.

How can I make a Roth IRA contribution if I earned too much money in 2017?

For 2017, if your modified adjusted gross income is below $181,000 and you file a joint return, you can make a Roth IRA contribution. For those who earned greater than $181,000 during the year, the IRS provides a formula, which will set forth the reduced maximum amount of Roth IRA contributions permitted for the year, if any.

One way to circumvent the Roth IRA income threshold rules, if to simply make an after-tax traditional IRA contribution and then convert the Traditional IRA into a Roth IRA. Since the Traditional IRA contribution was made after-tax there would be no tax on the Roth IRA conversion. This tactic was made possible when the IRS removed the income level restrictions for making Roth conversions in 2010.

Can I Make IRA contributions after age 70½

You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age.

To learn more about the IRA contribution rules, please contact an IRA tax expert at 800-472-0646.

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Dec 28

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?

No, the portion of your Roth IRA that consists of your contributions is never subject to income tax when it comes out – even if you take it out the day you made the contribution. That is because all contribution you made were nondeductible – meaning you already paid tax on the money. In addition, any distribution you take from a Roth IRA is presumed to be a return of your contributions until you have withdrawn all contributions you made to it over the years. In other words, all contributions all recovered before earnings before earnings are recovered.

If I establish a Roth IRA is there a certain amount of time I am not allowed to take tax-free distributions of investment returns?

Are Distributions that Consist of my Roth IRA Contributions Ever Subject to Income Tax?In general, you should not take a distribution of your investment returns for five years. A distribution within five calendar years of when you first establish a Roth IRA can never be a qualified distribution. Thus, counting the year of your first contribution as year one, you will satisfy the five-year requirement if you wait until the sixth year before withdrawing any earnings.

However, simply satisfying the five-year requirement will not automatically make a distribution qualified. It must also be at least one of the following:

  • A distribution you take after reaching 59 and 1/2
  • A distribution you take after becoming disabled
  • A distribution to your beneficiary or your estate after your death
  • A distribution you take to purchase a first home (up to a lifetime withdrawal limit of $10,000)

Therefore, if your distribution satisfies the five-year requirement and falls into one of the above categories, it will be qualified and, hence, entirely tax-free.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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Nov 17

The Roth IRA May Be Big Winner In 2016 Presidential Election

This article originally appeared on Forbes.com:

With the 2016 presidential election behind us, we can all start thinking about what this country will look like under President Donald Trump.  Notwithstanding all the pre-election campaign rhetoric about immigration, foreign policy, etc., one thing we are quite certain about is that President-Elect Trump is serious about reducing personal income and corporate tax rates across the board.  Both President-Elect Trump and House Speaker Ryan have put forth proposed tax reform plans and lawmakers will likely consider both plans when coming up with future American tax policy.

What we currently know is that both Trump and Ryan promise the lowest tax rate since before World War II and to shrink the personal income tax brackets from seven down to three.  Under the Trump plan, there would be three income tax rate brackets, 12%, 25%, and a top rate of 33%, which is lower than the current highest income tax rate of 39.6%.  Capital gain tax rates will remain much as they are, with a top tax rate of 20% under the Trump plan.  However, the biggest change under the Trump tax plan from the current tax system, is that business income of a taxpayer will be taxed at 15%. Whereas, the Trump and Ryan plan would make it difficult for individuals to benefit from specific deductions, as both plans raise the standard deduction limit.

Overall we should expect that a Trump Presidency will usher in lower personal and business taxes for most Americans.  So what does that mean for your retirement account contributions?  In general, when an individual is deciding to make IRA or pension contributions, such as to an employer 401(k) plan, the biggest question is generally whether contributions should be made in pre-tax or Roth.

A pre-tax IRA or 401(k) plan contribution provides the individual making the contribution with a current income tax deduction for the amount of the contribution, but the retirement account holder would ultimately be liable for income tax on any income taken out of the retirement account, with a 10% early distribution penalty if done prior to the age of 591/2.  Whereas, a Roth IRA or Roth 401(k) plan contribution is made with after-tax funds, meaning there is no immediate income tax deduction when the contribution is made, but if the retirement account holder is able to keep the Roth account opened at least five years and wait until reaching the age of 591/2, all Roth IRA or 401(k) funds can be taken out tax-free.  The Roth IRA does have an income limitation threshold, which is $194,000 for married couples filing jointly, but a backdoor way does exist for those individuals to still make Roth IRA contributions.

When a tax professional helps a client decide between making a pre-tax or Roth IRA or 401(k) plan contribution, one of the primary items the advisor will look at is the financial impact a deduction will have on the taxpayer’s income tax liability. The general thinking goes that if there is less tax to pay then taking a tax deduction would have less of a financial impact than in a higher tax environment, For example, if an individual earns $40,000 in annual income, under the Trump tax plan he or she would be subject to $4800 in taxes, versus a 25% income tax rate in 2016.

Sure, the IRA contribution deduction would be beneficial in reducing any income tax due, but such a deduction would likely have a lower financial impact on the taxpayer than with higher tax rates likely making the Roth contribution a more attractive option for many taxpayers.  The Trump victory and a low tax income policy will likely lead more tax advisors to consider and recommend the Roth IRA or Roth 401(k) contribution over a pre-tax retirement contribution.  Lower tax rates generally means income tax deductions carry less value. Weighing the financial loss of a current income tax deduction versus the super benefit of tax-free growth in a Roth IRA should make Roth contributions the popular choice for more Americans than ever before.

Some people will argue that lower tax rates means that saving money in a tax free retirement account, such as a Roth, will have less value since there would be less tax due on a distribution and the individual would likely be in a lower tax bracket at the retirement age of distribution. This argument ignores the fact that a Trump presidency will likely bring tax rates to historical lows, which for many Americans looking to retire in the next ten or twenty years, will likely mean a future with higher taxes.

It is unclear what type of impact a Trump presidency will have on the country and the entire world, but a Trump tax plan based on lower domestic income tax rates should make Roth contributions the big winner for many U.S. retirement account holders.

For more information about the Roth IRA, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.

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Aug 01

Making Your Kids a Millionaire with a Roth IRA

Here’s a great article from Forbes’ contributor, Vita Nelson about the beauty of compounding and Roth IRAs:

I have written often on the effects of compounding over the long term, emphasizing the simple but potent message that the sooner you start, the more the multiplying effect you will experience in your investments. That’s why it makes so much sense to help your children take advantage of the benefits of compounding within a Roth IRA.

Under current law, qualified Roth IRA distributions are not taxed, no matter how much income is reported on the taxpayer’s tax return. Anyone with earned income can have a Roth IRA, even a child.

You might consider hiring your children or grandchildren to do work around the house, or, if you run a business or a professional practice, you can hire them there. The younger the kids are, the better. You’ll not only cut your own taxes today, but you’ll set the kid on a path that could lead to a multi-million-dollar retirement fund decades down the road.

The premise is simple. Money you pay the youngsters reduces your business income and thereby your income taxes. The children will owe little or no tax, which you can pay for him or her, while fully funding their Roth IRAs.

Miracle of Compounding Creates Multi-Million Dollar Wealth

Suppose that you hire your child. If he earns at least $5,500 a year, that much could be invested in his Roth IRA. (You could pay a bit more in order to cover any payroll taxes.). If he works for your business for 10 years and your business makes no further payments to him after that, he would have contributed $55,000 to his Roth IRA.

How much that investment would be worth at the end of those 10 years depends on the rate of return during that period. To get an idea, we built models to calculate returns of 6%, 8%, and 10%.

Are these returns realistic? Morningstar’s Ibbotson subsidiary tracks investment returns going back to 1926. Through 2013, large-company stocks returned 10.1% a year. Shorter durations could be much lower or much higher. Our illustrations are assuming that we are going to be invested for the very long term.

Using our three models, we figured that the $55,000 total invested would be worth $74,669 at the end of 10 years at 6%, $82,863 at 8%, and $92,039 at 10%. Keep in mind that the full $55,000 was invested for only half the time, on average. (In the first year only $5,500 was invested and in the second, only $11,000, etc., so on average only $27,500 was invested for the full ten-year period.)

But the seemingly magical effect of compounding is only just beginning! Those first years are just to get the wheels rolling.

Let’s assume an 8% average annual return inside the Roth IRA, doubling every nine years (using the Rule of 72). The initial $55,000 ($5,500 invested every year for 10 years) would be worth about $3,831,415 after another 50 years, and if the average annual return were to be 10% per year, that figure would be $10,749,493. That’s the power of compounding.

Again, how reasonable are these calculations?  Even during the past 10 years, which included the “Great Recession,” the S&P 500 returned an annualized 7.98% and, over the past five years, an annualized 12.79%. As you can see, market returns vary from year to year, but over very extended periods, the broad averages seem to average out to be around 10% or better. If you can allow investments to compound over long periods of time at such average annual returns you will have amazing results!

Keep in mind that the multi-million dollar portfolio we calculated was achieved without any further investments after the first 10-year period. And if your child were able to continue to fund his or her Roth IRA account, the tax-free Roth IRA buildup is likely to be even more overwhelming.

Still, many assumptions underlie those accumulations. To begin with, what kind of work can a young child do to earn $5,500 or more? The IRS might be skeptical. The answer is: Lots of things. There’s no reason why you can’t hire your child to do work around your house and lawn or work around your office. If you run your own business, chances are that your business has a website and produces various promotional brochures. If a family theme fits in, you can use young children as models and pay them the going rate. Such pictures on your website or promotional brochures can help illustrate the benefits of your business to potential customers.

As your children grow older, the range of possible employment opportunities will expand, inside and out of the office. Besides the tasks that first come to mind (filing, cleaning, grounds keeping), your teenager (or pre-teen!) might help you establish a social media presence or do market research among peers.

When the child is off to college, you might buy a house near campus so your live-away collegian can avoid dorm fees while earning a management fee if you rent rooms to other students.

Tax Advantages for the Entire Family

As mentioned earlier, hiring your child or grandchild can have immediate tax advantages for your family. Say you have an effective 35% marginal tax rate and you pay your child $5,500 a year. You save $1,925 a year: 35% times $5,500.

There are other tax advantages for hiring your children. For instance, wages paid to a child under age 18 who works for his or her parent’s trade or business are not subject to Social Security and Medicare taxes, as long as the entity is a sole proprietorship or a partnership between the child’s parents. In addition, wages paid to a child under age 21 who works at a parent’s trade or business are not subject to federal unemployment tax.

Court cases have upheld deductions for wages paid to very young children, provided the parents could show they were paid fair compensation. And hiring your children can deliver more than tax savings for you and substantial long-term wealth for your child. At an early age, your youngsters can get an idea of what it means to work for money. They can learn values such as being on time, cooperating with other employees, and taking pride in accomplishing the tasks that they’ve been asked to perform.

Such beyond-school education might be largely lost on your three-year-old, but it won’t be long before your children are getting more from the entire exercise than just a Roth IRA.

Indeed, at some point you can begin to discuss investing with your child. It will be his or her retirement fund, so your child should have some idea of how the money is being invested and why. Helping your children to become intelligent investors can be at least as worthwhile as the money you’ll ultimately spend to send them to college!

That brings me to another important consideration: Unlike assets held directly in his or her name, assets held in a retirement account will not affect your child’s ability to obtain financial assistance to pay for college (even though some withdrawals from a Roth IRA can be made without penalty to pay for secondary education).

The same process can be established using no-fee DRIPs. The effect of compounding will be the same, but the dividends thrown off by the companies will be taxable annually at the child’s rate and eventually the gains will be taxed at favorable rates.

If you have any other questions about Roth IRA’s, please contact an IRA Expert at the IRA Financial Group @ 800.472.0646.
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Jul 01

Contributing to a Roth IRA

A taxpayer’s contributions to Roth IRAs during any year may not exceed a dollar ceiling (or, if less, the taxpayer’s compensation income), reduced by deductible contributions for the year to traditional IRAs. For 2016, the dollar ceiling will be $5,500. Also, for 2016, the ceiling is raised by $1,000 for individuals who are at least 50 years old at year-end.

Roth IRA Contribution Rules for 2016The maximum contribution is the same for traditional and Roth IRAs, but this ceiling applies differently to them because contributions to Roth IRAs are after-tax funds, whereas contributions to traditional IRAs are pretax funds. Assume A contributes $3,000 to a Roth IRA for 2016, and B contributes the same amount for the year to a traditional IRA; both are taxed at 30 percent at all times. Although only $3,000 of salary income was required to fund B’s contribution, A’s contribution effectively takes pretax income of $4,286 ($4,286, less 30 percent thereof, is $3,000). If each of the IRAs earns 8 percent, and each of the contributors withdraws the accumulated funds on retirement 10 years after the contributions are made, A will have $6,477 ($3,000 plus earnings at 8 percent for 10 years), and B will have $4,534 ($6,477 less 30 percent thereof).

Taxpayer’s ability to make a Roth IRA contribution begins to phase out when your adjusted gross income (AGI) exceeds $184,000 for joint filers and $117,000 for single filers in 2016. In addition, you are not permitted to make a contribution at all when your AGI exceeds $194,000 (for joint filers) or $132,000 (for single filers). Note: with a traditional IRA you may make a contribution even if your income is high and you are covered by an employer’s plan. However, you may not be able to deduct the contribution on your return.

Contributions in excess of the maximum are subject to a 6 percent excise tax unless the excess and income thereon are distributed to the owner not later than the due date of his or her return for the year (taking extensions into account). Income included in a distribution made within this time is included in the owner’s gross income for the year of the contribution, not the year of the distribution.

As with traditional IRAs, contributions to a Roth IRA are deemed made on the last day of the year if made before the following April 15. Contributions to a Roth IRA, unlike a traditional IRA, can be made by taxpayers older than 70 1/2.

Please contact one of our Roth IRA Experts at 800-472-0646 for more information.

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