Roth IRA

"Roth" redirects here. See also Traditional IRA

Introduction
An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

There are two basic types of IRA's, traditional and Roth.

Traditional IRA
 * Contributions are tax-deductible (depending on income level)
 * Withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2
 * Taxes are paid on earnings when withdrawn from the IRA
 * Available to everyone (although tax-deductibility depends on income level)
 * Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions)

Roth IRA
 * Contributions are not tax-deductible
 * There is no mandatory distribution age
 * All earnings and principal are tax free
 * Available only to those making under a certain income
 * Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions)

Contribution Eligibility and Limits
Modified AGI limit for 2008 Roth IRA contributions. For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations:
 * Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159,000. You cannot make a Roth IRA contribution if your modified AGI is $169,000 or more. [Partial contributions allowed between $159,000-$169,000].
 * Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008 and your modified AGI is at least $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more. [Partial contributions allowed between $101,000-$116,000].
 * Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.[Partial contributions allowed between -0- and $10,000].

Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your tax return modified as follows.

1.Subtract the following:
 * Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
 * Minimum required distributions from IRAs, (for conversions only).

2. Add the following deductions and exclusions:
 * Traditional IRA deduction,
 * Student loan interest deduction,
 * Tuition and fees deduction,
 * Domestic production activities deduction,
 * Foreign earned income exclusion,
 * Foreign housing exclusion or deduction,
 * Exclusion of qualified bond interest shown on Form 8815, and
 * Exclusion of employer-provided adoption benefits shown on Form 8839.

Beginning in 2009, contribution limits will be inflation-adjusted in $500 increments.

Other Limitations on IRA Contributions. These contribution limits apply to the total you can contribute to all of your IRAs. You cannot contribute the maximum amount to a traditional IRA and also make a contribution to a Roth IRA. The contribution maximum can be divided between the IRAs in any way you wish but the total cannot exceed the limit.

IRA contributions are also limited by the amount of your earned income. The total amount you can contribute to your IRAs cannot be greater than the amount of your earned income for the year of the contribution. For married couples filing jointly, the earned income of either spouse can be used to make the contributions to each person’s IRAs. It makes no difference which spouse has the earned income, but the total earned income cannot be less than the total of the IRA contributions for both individuals. The IRS defines earned income as the taxable income and wages you get for working. Either working for someone who pays you or working for a business you own. If you are working for someone else, earned income will be reported on line 3 of your W-2. If you are working for a business you own, your earned income is the net income reported on the Schedule C less 50% of the self-employment taxes you pay. Other types of income do not fit the definition of earned income and cannot be used for Roth IRA contributions.

Conversion to Roth IRA
You can convert a Traditional IRA to a Roth IRA if:


 * your Modified AGI (see above) does not exceed $100,000, and
 * you are not married filing separately.

Links

 * IRS Publication 590: Roth IRAs
 * Fairmark.com guide to Roth IRAs and related accounts

Papers: Roth IRAs

 * Keebler, Bob, and Bigge, Stephen, “To Convert or Not to Convert: That is the Question.” CCH Journal of Retirement Planning ( (May-June 2007. Available at http://www.ataxplan.com/bulletinBoard/ira_conversions.cfm
 * Reichenstein, William, "Tax-Efficient Sequencing Of Accounts to Tap in Retirement" TIAA-CREF Institute (October, 2006). Available at http://www.tiaa-crefinstitute.org/research/trends/docs/tr100106.pdf

Papers: Roth 401-k and Roth 403-b Plans

 * Ahern, Michael, Ameriks, John, Dickson, Joel, Nestor,Robert, Utkus Stephen, "Tax Diversification and the Roth 401(k)" Vanguard Center for Retirement Research (October, 2005. Available at https://institutional.vanguard.com/iip/pdf/CRR_Roth_401k.pdf
 * McQuarrie,Edward F. Ph.D., " Thinking About a Roth 401(k)? Think Again" Journal of Financial Planning, (July, 2008)
 * Reichenstein, William, Rothermich, Douglas, Waltenberger,Alicia, "The Expanding “Roth” Retirement Account" TIAA-CREF Institute (March, 2006). Available at http://www.tiaa-crefinstitute.org/research/trends/docs/tr030106.pdf