Member Education
ROTH IRA Q&A
Here's some IRA information that could provide you with a rare benefit - a tax cut.
Q. What is a Roth IRA?
A. A Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for former Senate Finance Committee Chairman William Roth, Jr., this IRA offers more incentives to boost your retirement savings, as well as more ways to use your nest egg.
Q. How does a Roth IRA work?
A. Unlike traditional IRAs, contributions to a Roth IRA are never tax-deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to the plan provisions to get this tax-free advantage.
Q. Am I eligible to contribute to a Roth IRA?
A.You are eligible if you earn compensation and your income is less than limits set by Congress. A single filer who has modified adjusted gross income (MAGI) up to $101,000 can make the full Roth IRA contribution for that year. Each spouse filing a joint federal income tax return showing a MAGI up to $159,000 can make the full Roth IRA contribution for that year. Some people with higher MAGI may be able to make smaller contributions.
Q. Can I still contribute to a Roth IRA if I participate in an employer-sponsored retirement plan?
A.Yes, and you can contribute past age 70½, as long as you continue to earn compensation.
Q. How much is the full Roth IRA contribution?
A. The amount of a full Roth IRA contribution varies. If you meet the eligibility tests described previously and you are under age 50, you can contribute up to $5,000 for tax years up to2010. For owners age 50 and older, your limits increase to $6,000 for tax years up to 2010.
Q. Will my Roth IRA affect the amount that I can contribute to my employer-sponsored retirement plan?
A. No. The amount you contribute to your 401(k) or other employer-sponsored plans will not be affected by your Roth IRA. However, you must conform to the plan contribution limits for your employer-sponsored plan.
Q. Can I convert my existing traditional IRA to a Roth IRA?
A. Yes. You can convert your traditional IRA to a Roth IRA if your MAGI in the year of the conversion is under $100,000. This limit is the same for both single filers and married couples who file jointly. Married taxpayers who file separately are not eligible for a Roth conversion. Use care and be sure to get all the facts. This is a complicated decision.
Q. If I convert a traditional IRA to a Roth IRA, do I owe any taxes?
A. Yes. Upon conversion, you will owe ordinary income taxes on your investment earnings and on deductible contributions you have made to your traditional IRA. This amount is taxable income in the year the money leaves the traditional IRA. Basically, you owe tax on any money that has not been taxed before. But you will have the opportunity to withdraw earnings made after the conversion, free of any taxes.
Q. What about penalties on conversions from traditional IRAs to Roth IRAs?
A.The ten percent early withdrawal penalty is waived on IRA conversions.
MAGI Limits Increased for Regular Roth Contributions for 2008
The IRS has announced the income phase-out ranges for making 2008 Roth IRA
contributions. They are:
| MAGI LIMITS FOR REGULAR ROTH IRA CONTRIBUTIONS FOR 2008 | ||
| Filing Status | Income Limit for Full Contribution | Phase-out Range (Partial Contribution) |
| Single | Up to $101,000 | $101,000 up to $116,000 |
| Married, filing jointly | Up to $159,000 | $159,000 up to $169,000 |
| Married, filing separately |
$0 | $0 up to $10,000 |
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For more details, call one of our IRA Specialists at: (800) 479-7928, or visit an RCU branch.
This article is not intended as tax advice. Please contact a tax professional.
