2. Introduction to Roth IRAs Contributions are made on an after-tax basis There’s no up-front tax benefit Qualified distributions are entirely free from federal income tax New rules for 2010 Caution: Different rules may apply for state tax purposes
12. Qualified Distributions - Example 2 Age 35 Establish first Roth IRA on June 1, 2010, by making a rollover from a 401(k) plan to the Roth IRA Must have qualifying event AND satisfy five-year holding period Five-year holding period begins January 1, 2010 Five-year holding period ends December 31, 2014 Tax-free qualified withdrawals available from this Roth IRA, and any other Roth IRA you own: In 2034, after you attain age 59½ After December 31, 2014, if you become disabled or die* After December 31, 2014, if you have first-time homebuyer expenses (up to $10,000 lifetime from all IRAs)* Qual event 59 ½ in 2034 5-year period starts 1/1/10 5 year ends 12/31/14 Est first Roth IRA 6/31/10 Tax-free dist *Tax-free dist after 12/31/14
13. Qualified Distributions - Example 3 You inherit a Roth IRA from your mother in 2010 Your mother established her first Roth IRA in 2007 by making a regular annual contribution Must have qualifying event AND satisfy five-year holding period Qualifying event is your mother’s death Five-year holding period begins January 1, 2007 Five-year holding period ends December 31, 2011 Tax-free qualified withdrawals are available from the inherited Roth IRA anytime after December 31, 2011 Qual. event in 2010 mother’s death 5-year period starts 1/1/07 5-year period ends 12/31/11 Tax-free dist after 12/31/11 Mother est. first Roth IRA in 2007
18. Converting a Traditional IRA to a Roth IRA Taxed at conversion as if you took a withdrawal (but 10% early distribution does not apply) Trade off immediate taxation for possibility of tax-free qualified distributions in future You can also convert SIMPLE IRAs (after two-year waiting period) and SEP IRAs to Roth IRAs
19. Ways to Convert a Traditional IRA to a Roth IRA Rollover Trustee-to-trustee transfer Same-trustee transfer
20. Calculating the Conversion Taxes Taxed as if you took a withdrawal from the traditional IRA 10% penalty tax doesn’t apply (but may be recaptured if you make a nonqualified withdrawal from your Roth IRA within five years of any conversion)
21. Calculating the Conversion Taxes Only deductible contributions and earnings If you’ve made only deductible contributions to your traditional IRAs, then the entire amount you convert is subject to income tax. IRA = Fully taxable conversion
22. Calculating the Conversion Taxes TAXABLE Deductible contributions and earnings NONTAXABLE Non-deductible contributions If you’ve made nondeductible (after-tax) contributions to your traditional IRA, any distribution consists of pro-rata amount of taxable and nontaxable dollars Can’t just convert nontaxable dollars in a traditional IRA for tax-free conversion IRA
23. Calculating the Conversion Taxes IRA #1 TAXABLE Deductible contributions and earnings TAXABLE Deductible contributions and earnings TAXABLE Deductible contributions and earnings IRA #2 NONTAXABLE Non-deductible contributions NONTAXABLE Non-deductible contributions NONTAXABLE Non-deductible contributions IRA IRA Must aggregate all traditional IRAs you own, including SEP and SIMPLE IRAs, when calculating the taxable amount of a withdrawal or conversion
28. Special Deferral Rule for 2010 Special rule applies only to conversions in 2010 Can report half of the conversion income on your 2011 federal income tax return, and the other half on your 2012 tax return Or can report all of the income in 2010
32. Converting Employer Plan Dollars to a Roth IRA Eligible distributions from 401(k), 403(b), 457(b), and qualified plans can be rolled over to traditional or Roth IRA Your employer will identify an eligible rollover distribution Amounts rolled over to a Roth IRA are taxed except for any after-tax contributions Rollovers to a Roth IRA in 2010 are eligible for special 2010 deferral rule Beginning in 2010 anyone can roll over to a Roth IRA, regardless of income limits or marital status--even non-spouse beneficiaries Rollovers from employer plans can be complicated, and can have serious tax implications
33. Using the New Rules to Fund Annual Roth Contributions You can contribute up to $5,000 to a Roth IRA in 2010 Individuals age 50 or older can make additional “catch up” contribution of $1,000 Annual contributions may be limited depending on income level and filing status:
34. Using the New Rules to Fund Annual Roth Contributions Even if you can’t contribute to a Roth IRA because of the income limits, you can contribute to a traditional IRA if you’re under age 70½ Anyone can convert a traditional IRA to a Roth beginning in 2010, regardless of income or marital status You can make nondeductible contributions initially to a traditional IRA Convert that traditional IRA to a Roth Remember to aggregate your traditional IRAs when calculating tax Traditional IRA Roth IRA First contribute to: Then convert to: Up to $5,000 in 2010 ($6,000 if age 50 or older)
37. What if a Conversion Doesn’t Work Out? “Recharacterize!” You may be able to undo, or “recharacterize,” a conversion by carefully following IRS rules Deadline is due date for filing your tax return for year of conversion, plus extensions For example, you generally have until October 15, 2011, to undo a 2010 conversion Assets are transferred to traditional IRA; treated for tax purposes as if Roth conversion never occurred Can convert traditional IRA back to a Roth after waiting period, which can be as short as thirty days.
38. Conclusion I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have.
39. Disclaimer Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.
Hinweis der Redaktion
So, now that we’ve covered how Roth IRAs work, how do you participate in this Roth revolution? There are three primary ways to fund a Roth IRA. <CLICK> The first is by making regular annual contributions, if you qualify based on your earnings. <CLICK> The second is by rolling over an eligible distribution from an employer retirement plan, like a 401(k), to a Roth IRA. <CLICK> The third way is by converting a traditional IRA to a Roth IRA. We’ll talk about the first two methods later on. But for now, let’s focus on conversions. <CLICK>
A conversion lets you turn your traditional IRA into a Roth IRA. <CLICK>When you convert your traditional IRA to a Roth IRA, you’re taxed as if you took a withdrawal equal to the amount of the conversion. So by converting, you’ll accelerate the taxation of your traditional IRA. <CLICK> Why would you want to do this? Again, as we discussed earlier, you trade off paying taxes now with the hope and expectation that later distributions from your Roth IRA will be qualified, and therefore tax-free.<CLICK> When we talk about conversions, the term “traditional IRA” also includes SEP IRAs and SIMPLE IRAs. You can convert these to Roth IRAs as well, but for SIMPLE IRAs you’ll have to satisfy a two-year waiting period before you can convert to a Roth. <CLICK>
Before 2010, you weren't able to convert a traditional IRA to a Roth IRA if your income exceeded $100,000, or you were married and filed separate federal income tax returns. <CLICK> Thanks to recent changes in federal law, however, anyone can convert a traditional IRA to a Roth IRA beginning in 2010, without regard to income limits or marital status.There is one important exception: if you inherit a traditional IRA, you can't convert that inherited IRA to a Roth. However, special rules apply to spouse beneficiaries. If you are the surviving spouse and you inherit a traditional IRA, you can roll those funds into your own traditional IRA, and then make a Roth conversion. If you are the surviving spouse and sole beneficiary, you can also treat the inherited IRA as your own, and then make a conversion.<CLICK>
The third way way to fund a Roth IRA is simply by making annual contributions to the account. <CLICK> You can contribute up to $5,000 to a traditional IRA or Roth IRA, or to a combination of both, in 2010. <CLICK> The limit is $6,000 if you're age 50 or older.<CLICK> But your ability to make annual contributions to a Roth IRA depends on your earnings, specifically the amount of your modified adjusted gross income. These limits have not been repealed. So if you’re a high-income taxpayer, your ability to make annual contributions to a Roth IRA may still be reduced, or even eliminated. <CLICK>
But even if the income limits prohibit you from making annual contributions directly to a Roth IRA, you can still accomplish the same result by using the new liberal conversion rules. This is how it would work: <CLICK> Anyone younger than age 70½ can make nondeductible contributions to a traditional IRA, regardless of income, marital status, or participation in an employer retirement plan. The only requirement is that youhave compensation for the year at least equal to the amount of your contribution. And as we know, virtually anyone can convert a traditional IRA to a Roth IRA beginning in 2010.<CLIICK> So you would make your annual contribution initially to a traditional IRA. <CLICK> You can then immediately convert the traditional IRA to a Roth, using the new liberal conversion rules.<CLICK> But remember, you’ll need to aggregate all your traditional IRAs when you calculate the taxable portion of the conversion.<CLICK>
Well, that brings us to the end of our presentation. I hope you’ve found this information helpful as you consider the new Roth conversion opportunities for 2010.Thank you for your time. You’ve been a wonderful audience. I would welcome the opportunity to meet individually with each of you to address any specific concerns or questions that you may have.