Roth IRAs
Beginning in 1998, you may be able to establish and contribute to
a new nondeductible tax-free individual retirement arrangement (a plan)
called the Roth IRA. Unlike certain contributions to a traditional IRA,
you cannot claim a deduction for any contributions to a Roth IRA. But,
if you satisfy the requirements, qualified distributions are tax free.
Chapter 2 of Publication 590
has detailed information on Roth IRAs.
Although created by 1997 legislation, 1998 was the first year that
Roth IRAs could be established. The following changes are the result of
technical corrections legislation in 1998.
Income limits reduced for married persons filing
separately. The amount of modified adjusted gross income (MAGI)
you can have and still contribute to a Roth IRA has been reduced from $15,000
to $10,000 if you are married filing a separate return. You cannot contribute
to a Roth IRA if your MAGI is $10,000 or more.
Modified adjusted gross income (MAGI).
To figure MAGI for Roth IRA purposes, do not reduce adjusted gross income
(AGI) by any deduction for contributions to traditional IRAs.
Excess contributions withdrawn before the return
due date. If you make an excess contribution to a Roth IRA but you
withdraw the excess amount and the earnings on it before the due date of
your return (including extensions), that withdrawal is not a qualified
distribution. The withdrawn earnings are taxable and may be subject to
the 10% additional tax on early withdrawals.
Converting a traditional IRA to a Roth IRA.
If you withdrew an amount from a traditional IRA in 1998 and converted
it to a Roth IRA, any amount you must include in income as a result of
the withdrawal is generally included ratably over a 4-year period, beginning
with 1998. You can elect to include the total amount in 1998 rather than
ratably over the 4-year period. If you make the election, you cannot change
it after the due date (including extensions) for your 1998 tax return.
Withdrawals during the 4-year period.
If you include the taxable part of a 1998 conversion ratably over the 4-year
period and before 2001 you withdraw from the Roth IRA any amount that is
allocable to the taxable part of the conversion, you will generally have
to include in income:
- The amount includible for that year because of the 4-year rule,
and
- The part of the withdrawal made during the year that is allocable
to the taxable part of the conversion.
Death of IRA owner during the 4-year period.
If a Roth IRA owner who is including amounts ratably over the
4-year period dies before including all of the amounts in income, all remaining
amounts must generally be included in the owner's gross income for the
year of death. However, if the owner's surviving spouse receives the entire
interest in all the owner's Roth IRAs, that spouse can elect to continue
to ratably include the amounts in income over the remaining years of the
4-year period.
Additional tax on withdrawals of conversion
contributions. If, within the 5-year period starting with the
year of a conversion contribution, you withdraw any part of a Roth IRA
that is from the taxable part of a converted amount, the 10% additional
tax on early withdrawals generally applies to that part.
Ordering rules for certain withdrawals.
If you make a withdrawal from your Roth IRA that is not a qualified distribution,
part of the withdrawal may be taxable. For purposes of determining the
correct tax treatment of withdrawals (other than the withdrawal of excess
contributions and the earnings on them), there is a rule that sets the
order in which you withdraw contributions (including conversion contributions)
and earnings from your Roth IRA. The order of withdrawals is as follows.
- Regular contributions.
- Conversion contributions (taxable portion first), on a first-in
first-out basis.
- Earnings on contributions.
Rollover contributions from other Roth IRAs are disregarded for this
purpose.
Recharacterizing your contribution before the
due date of your return. Because of the limits and restrictions
on various contributions to Roth and traditional IRAs, you may need to
make adjustments to your IRAs before you file your return for the year.
You may be able to treat a contribution made to one type of IRA as having
been made to a different type of IRA. This is called recharacterizing the
contribution.
To recharacterize a contribution, you generally must have the contribution
transferred from the first IRA (the one to which it was made) to the second
IRA in a trustee-to-trustee transfer. If the transfer is made by the due
date (including extensions) for your tax return for the year during which
the contribution was made, you can elect to treat the contribution as having
been originally made to the second IRA instead of to the first IRA.
SEP or SIMPLE retirement accounts. Neither
a simplified employee pension (SEP) nor a SIMPLE retirement account can
be designated as a Roth IRA. When figuring the Roth IRA contribution limit,
you do not reduce it by any employer contributions on your behalf to a
SEP or a SIMPLE retirement account.
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