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Chapter 18 - Individual Retirement Arrangements (IRAs)

Roth IRAs

This is archived information that pertains only to the 2000 Tax Year. If you
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Regardless of your age, you may be able to establish and make nondeductible contributions to a retirement plan called a Roth IRA.

You can make contributions for 2000 by the due date (not including extensions) for filing your 2000 tax return. This means that most people can make contributions for 2000 by April 16, 2001.

Contributions not reported. You do not have to report Roth IRA contributions on your return.


What Is a Roth IRA?

A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined below). It can be either an account or an annuity. Individual retirement accounts and annuities are described in Publication 590.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Neither a SEP-IRA nor a SIMPLE IRA can be designated as a Roth IRA.

You cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70 and you can leave amounts in your Roth IRA as long as you live.

Traditional IRA. A traditional IRA is any IRA that is not a Roth IRA, SIMPLE IRA, or education IRA.

Table 18-2. You Can Contribute to a Roth IRA


Can I Contribute to a Roth IRA?

Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified AGI (defined later) is less than the amount shown for your filing status in Table 18-2.

Is there an age limit for contributions? Contributions can be made to your Roth IRA regardless of your age.

Can I contribute to a Roth IRA for my spouse? You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit discussed earlier under Traditional IRAs and your modified AGI (defined later) is less than the amount shown for your filing status in Table 18-2.

Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, and taxable alimony and separate maintenance payments.

Modified AGI. Your modified AGI is your adjusted gross income (AGI) as shown on your return modified as follows.

  1. Subtract any income resulting from the conversion (rollover) of an IRA (other than a Roth IRA) to a Roth IRA (conversion income).
  2. Add the following deductions and exclusions:

    1. Traditional IRA deduction,
    2. Student loan interest deduction,
    3. Foreign earned income exclusion,
    4. Foreign housing exclusion or deduction,
    5. Exclusion of qualified bond interest shown on Form 8815, and
    6. Exclusion of employer-paid adoption expenses shown on Form 8839.


How Much Can Be Contributed?

The contribution limit for Roth IRAs depends on whether a contribution is made only to Roth IRAs or to both traditional IRAs and Roth IRAs.

Roth IRAs only. If a contribution is made only to Roth IRAs, the maximum contribution limit is the lesser of $2,000 or your taxable compensation. If your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later in Contribution limit reduced.

Roth IRAs and traditional IRAs. If you contribute to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs is the lesser of:

  1. The maximum contribution limit reduced by all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or
  2. The maximum contribution limit reduced because your modified AGI is above a certain amount, as explained next.

Contribution limit reduced. If your modified AGI is above a certain amount, your maximum contribution limit is gradually reduced. Use Table 18-3 to determine if this reduction applies to you.

Figuring the reduction. If your modified AGI is within the range shown in Table 18-3 for your filing status, see Publication 590.


When Can I Make Contributions?

You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).


What If I Contribute Too Much?

A 6% excise tax applies to any excess contribution to a Roth IRA.

Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:

  1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA, as described later) that are more than your contribution limit for the year, plus
  2. Any excess contributions for the preceding year, reduced by the total of:

    1. Any distributions out of your Roth IRAs for the year, plus
    2. Your contribution limit for the year minus your contributions to all your IRAs (other than education IRAs) for the year.

Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment applies only if any earnings on the contributions are also withdrawn and are reported as income earned and receivable in the year the contribution was made.

Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.

Table 18-3. AGI limit (Roth IRAs)


Can I Move Amounts Into a Roth IRA?

You may be able to convert amounts from either a traditional (including SEP-IRA) or SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA.


Conversions

You can convert a traditional IRA or a SIMPLE IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described under Rollover From One IRA Into Another under Traditional IRAs, earlier, apply to these rollovers. However, the 1-year waiting period does not apply.

Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

  1. Rollover . You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.
  2. Trustee-to-trustee transfer . You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.
  3. Same trustee transfer . If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.

Converting from any traditional IRA. You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.

  1. Your modified AGI (explained earlier) is not more than $100,000.
  2. You are not a married individual filing a separate return. (See Married filing separately exception, under Filing status, earlier.)

Required distributions. Amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70) under the required distribution rules (discussed under Traditional IRAs, earlier) cannot be converted.

Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.

Income. You must include in your income distributions from a traditional IRA that you would have to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed earlier under Traditional IRAs

If you must include any amount in your gross income, you may have to make estimated tax payments. See Chapter 5.

How to treat 1998 conversions. If you converted amounts from a traditional IRA in 1998 to a Roth IRA, any amount you had to include in income as a result of the distribution is generally included ratably over a 4-year period, beginning with 1998. This means you included one-quarter of the amount in income in 1998 and one-quarter in 1999, and must include one-quarter in 2000 and one-quarter in 2001. However, see Distributions from Roth IRA, next.

Distributions from Roth IRA. If you are including the taxable part of a 1998 conversion ratably over the 4-year period and in 2000 any amount allocable to the taxable part of the conversion is distributed from the Roth IRA, you will generally have to include in income both the ratable (one-quarter) portion for the year and the part of the distribution made during the year that is allocable to the taxable part of the conversion. See Ordering rules for distributions, later for information on how to determine the amount allocable to the taxable part of the conversion.

Death of Roth IRA owner during 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, any amounts not included must generally be included in the owner’s (decedent’s) gross income for the year of death. However, if the decedent’s surviving spouse receives the entire interest in all the decedent’s Roth IRAs, that spouse can elect to continue to ratably include the amounts in income over the remaining years in the 4-year period. See Publication 590 for more information on making this election.

Converting from a SIMPLE IRA. Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained earlier under Converting from any traditional IRA.

However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date, you first participated in any SIMPLE IRA plan maintained by your employer.

More information. For more detailed information on conversions, see Publication 590.


Rollover From a Roth IRA

You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. The rules for rollovers explained under Rollover From One IRA Into Another, under Traditional IRAs, earlier, apply to this rollover.


Failed Conversions

If, when you converted amounts from a traditional IRA or SIMPLE IRA (including a transfer by redesignation) into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but events changed these facts, you have made a failed conversion.

Adverse consequences. If the converted amount (contribution) is not recharacterized (explained later), the contribution will be treated as a regular contribution to the Roth IRA and subject to the following tax consequences.

  1. A 6% excise tax per year will apply to any excess contribution not withdrawn from the Roth IRA.
  2. The distributions from the traditional IRA must be included in your gross income.
  3. The 10% additional tax on early distributions may apply to any distribution.

How to avoid. You must move the amount converted (including all earnings from the date of conversion) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion to the Roth IRA. You do not have to include this distribution (withdrawal) in income. See Recharacterizations, next for more information.


Recharacterizations

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. More detailed information is in Publication 590.

No deduction allowed. No deduction is allowed for the contribution to the first IRA and any net earnings transferred with the recharacterized contribution are treated as earned in the second IRA.

How to recharacterize a 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. It will be treated as having been made to the second IRA on the same date that it was actually made to the first IRA.

Required notifications. To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA that you have elected to treat, for federal tax purposes, the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.

  • The type and amount of the contribution to the first IRA that is to be recharacterized.
  • The date on which the contribution was made to the first IRA and the year for which it was made.
  • A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income allocable to the contribution to the trustee of the second IRA. If there was a loss while the contribution was in the first IRA, the net income that must be transferred may be a negative amount. Beginning in 2000, there is a new method available for calculating net income allocable to recharacterized contributions.
  • The name of the trustee of the first IRA and the name of the trustee of the second IRA.
  • Any additional information needed to make the transfer.

Note. If the trustee of your first IRA is for any reason unable to calculate the amount of net income you must transfer, get IRS Notice 2000-39. The notice explains the IRS-approved method of calculating the amount you must transfer.

Reporting a recharacterization. If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on Form 8606. You must treat the contribution as having been made to the second IRA.


Are Distributions From My Roth IRA Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering rules for distributions, later.

What are qualified distributions? A qualified distribution is any payment or distribution from your Roth IRA made after the 5-taxable-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit if the payment or distribution is:

  1. Made on or after the date you reach age 59,
  2. Made because you are disabled,
  3. Made to a beneficiary or to your estate after your death, or
  4. To pay certain qualified first-time homebuyer amounts discussed in Publication 590.

Distributions that are not qualified distributions. A distribution is not a qualified distribution if it is:

  1. Made within the 5-year period beginning with the first year for which either a regular or a conversion contribution was made to a Roth IRA set up for your benefit.
  2. Made after the 5-year period described in (1), but you do not meet any of the following requirements.

    1. You have not reached age 59.
    2. You are not disabled.
    3. The distribution is not made to a beneficiary or to your estate after your death.
    4. You do not use the distribution to pay certain qualified first-time homebuyer amounts. (See First home under When Can I Withdraw or Use IRA Assets? in chapter 1 of Publication 590.)
  3. The withdrawal of contributions and earnings on or before the due date of your return (including extensions) for the year in which you made the contributions. The returned contributions are not taxable, but the distributed earnings are taxable in the year the contribution to which they relate was made and may be subject to the 10% additional tax on early distributions.

Additional tax on distributions of conversion contributions within 5-year period. If within the 5-year period starting with the year in which you made a conversion contribution, any part of a distribution from a Roth IRA is from the taxable part of the conversion contribution, the 10% additional tax on early distributions generally applies. It applies to the portion of the conversion contribution that is includible in income because of the conversion. And it applies as though the amount is includible in gross income in the year of the distribution, even if you had included it in income in an earlier year (such as the year of conversion).

Additional tax on other early distributions. The taxable part of other distributions from your Roth IRA(s) that are not qualified distributions is subject to the additional tax on early distributions. See Publication 590 for more information.

Ordering rules for distributions. If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. For purposes of determining the correct tax treatment of distributions (other than the withdrawal of excess contributions and the earnings on them, discussed earlier), there is an order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. Regular contributions are distributed first. See Publication 590 for more information.

Am I required to take distributions when I reach age 70? You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.

More information. For more detailed information on Roth IRAs, see Publication 590.

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