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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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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Feb 12

Do You Have to Take Roth IRA Distributions in a Certain Order?

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

Do You Have to Take Roth IRA Distributions in a Certain Order?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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May 07

Contribution and Distribution Rules for 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 2015, the dollar ceiling will be $5,500. The ceiling is raised by $1,000 for individuals who are at least 50 years old at year-end.

The 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 2014, 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 $183,000 (for joint filers) and $116,000 for single filers. In addition, you are not permitted to make a contribution at all when your AGI exceeds $193,000 (for joint filers) or $131,000 (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.

Contribution and Distribution Rules for a Roth IRAContributions 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.

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Roth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time homebuyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time homebuyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time homebuyer distributions received by the recipient.

A nonqualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a nonqualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

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

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Feb 24

Contribution and Distribution Rules for Your Roth IRA

Contribution Rules

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 2013 & 2014, the dollar ceiling is $5,500. Further, if you are at least 50 years of age before the end of the year, you may contribute another $1,000 as a “catch-up” contribution.

The 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 2013, 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 eight percent, and each of the contributors withdraws the accumulated funds on retirement ten years after the contributions are made, A will have $6,477 ($3,000 plus earnings at eight percent for ten years), and B will have $4,534 ($6,477 less 30 percent thereof).

Contribution and Distribution Rules for your Roth IRATaxpayer’s ability to make a Roth IRA contribution begins to phase out when your adjusted gross income (AGI) exceeds $178,000 (for joint filers) and $112,000 for single filers. In addition, you are not permitted to make a contribution at all when your AGI exceeds $188,000 (for joint filers) or $127,000 (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 six 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.

Distribution Rules

Distributions from Roth IRAs are not required to begin at any particular time, and there are no limitations on death benefits. Distributions from a traditional IRA, in contrast, must begin by April 1 following the year in which the owner reaches age 70 1/2 or (if later) retires and must generally be made in ways that will exhaust the account during the lifetimes or over life expectancies of the owner and his or her spouse. In other words, while congressional policy is that traditional IRAs be for retirement savings only, Congress acquiesces in the use of Roth IRAs for accumulating wealth to be transmitted at death.

Roth and traditional IRAs are subject to the same rules for distributions after the owner’s death. If the beneficiary is not the surviving spouse, distributions must either be completed by the end of the fifth calendar year following the year of the owner’s death or consist of a series of payments beginning before the end of the calendar year following the year of death and continuing not longer than the beneficiary’s life expectancy. If the beneficiary is a surviving spouse, distributions may be delayed until the spouse reaches age 70 1/2 or retires, or the spouse may elect to treat the IRA as his or her own.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Qualified special purpose distributions are distributions, up to a $10,000 lifetime maximum, that are “used” by the distributee within 120 days to pay “qualified acquisition costs” for property to serve as the “principal residence” of a “first-time home-buyer,” who must be the IRA owner, his or her spouse, or a child, grandchild, or more remote ancestor of the owner or spouse. Qualified acquisition costs are costs of acquiring, constructing, or reconstructing a residence, including “reasonable settlement, financing, or other closing costs.” A first-time home-buyer is a person who has not had a “present ownership interest in a principal residence” during the two years preceding the acquisition of the residence financed with the distribution. A distribution can qualify only to the extent of $10,000, less all prior qualified first-time home-buyer distributions received by the recipient.

A non-qualified distribution is excluded from gross income only to the extent of the excess of the taxpayer’s contributions to Roth IRAs, less all prior distributions, qualified and unqualified. A distribution of an excess contribution is not qualified and is therefore included in gross income to the extent of the income of the account required to be included in the distribution. An amount included in gross income on a non-qualified distribution may be subject to an additional 10 percent penalty tax under Internal Revenue Code Section 72(t) (e.g., if made to the owner before age 59 1/2 ). Very generally, the effect of these rules is that investment returns of a Roth IRA are tax-free to the distributee if received in a qualified distribution but are otherwise taxed.

The basis of property other than money received in a distribution from a Roth IRA is the property’s fair market value, whether or not the distribution is qualified. An owner’s lifetime gift of a Roth IRA to another person is treated as a distribution in full to the owner and a gift of an account or annuity that is not an IRA.

Please contact one of the Roth IRA Experts at the IRA Financial Group at 800-472-0646 for more information.  Don’t forget to give us a like on Facebook!

Apr 05

The Dividend Growth Self-Directed Roth IRA LLC Solution

The Self-Directed Roth IRA LLC Dividend Growth Strategy is designed to help retirement investors generate tax-free income for their retirement

IRA Financial Group, the leading provider of “checkbook control” self-directed Roth IRA LLC structures announces the introduction of the Dividend Growth Self-Directed Roth IRA solution. The Self-Directed Roth IRA Dividend Growth strategy is focused on allowing retirement investors use their after-tax retirement funds to invest for the long term in the stocks of companies that not only pay dividends, but consistently increase their dividends from year to year. The strategy is based on reinvesting the dividends and investing new funds annual Roth IRA contributions. The Roth IRA Dividend Growth strategy is designed to offer retirement investors to create a sustainable, rising stream of dividend income that will eventually generate a generous income stream allow one to be financially secure in retirement without ever paying tax again. “The Self-Directed Roth IRA Dividend Growth Strategy is designed to allow one to generate a significant tax-free income stream upon retirement, “ stated Mr. Adam Bergman, a tax attorney with the IRA Financial Group.

With the Self-Directed Roth IRA Dividend Growth strategy accomplishes two very important objectives: (1) it provides the investor with an increasing level of tax-free income each year that can be used to pay for retirement, college, travel or the normal inflation impacted prices of goods, and (2) when prices go down, the retirement investor doesn’t have to sell shares in order to live. “The Roth IRA LLC Dividend Growth strategy is best implemented with Roth IRA funds since the income generated from the dividends would be exempt from tax, “ stated Mr. Bergman.

IRA Financial Group’s Self-Directed Roth IRA, is an IRS approved structure that allows one to use their retirement funds to make stock, mutual funds, real estate and other investments tax-free and without custodian consent. The Self-Directed Roth IRA involves the establishment of a limited liability company (“LLC”) that is owned by the Roth IRA (care of the Roth IRA custodian) and managed by the IRA holder or any third-party. As manager of the Roth IRA LLC, the Roth IRA owner will have control over the Roth IRA assets to generate tax-free income from a dividend growth strategy.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

IRA Financial Group is the market’s leading “checkbook control Self Directed IRA Facilitator. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group and the Self-Directed Roth IRA LLC Dividend Growth Strategy please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.