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Home > Personal Banking > Retirement Services > A Guide to Roth IRAs
  • A Guide to Roth IRAs

    Contributions to a Roth IRA are not deductible, but your investment earnings over the years can be tax-free. So when you begin to withdraw your earnings you will pay no additional tax. In other words, you get tax-free growth on compounded interest.


    The Basics of Roth IRAs:

    • Allow you to invest after-tax dollars, lets the investment grow tax-deferred, and takes qualifying withdrawals tax-free
    • Have no age limit on making contributions

    You Can Contribute:

    • At any age
    • If you have earned income from employment
    • Up to a maximum of $5,000 per year if individual adjusted modified income is less than $101,000, and $10,000 per year for couples if their adjusted modified income is less than $159,000

    The Difference Between a Traditional IRA and Roth IRA

    Who Is It For?

    • TRADITIONAL IRA: For individuals under age 70½ who have earned income.
    • ROTH IRA: For individuals of any age with earned income and adjusted gross income below $116,000 (single) or $169,000 (joint). However, the amount you are allowed to contribute each year does decline once you reach adjusted gross income over $101,000 (single) and $159,000 (joint).

    Is It Tax-Deferred or Tax-Free?

    • TRADITIONAL IRA: A tax-deferred investment with a possible tax deduction if you do not have an employer-sponsored retirement plan or if your income is below certain levels.
    • ROTH IRA: A tax advantage which is tax-free investment growth if the account has been open for five years or more and meets the qualified distribution rule. There are no tax deductions for contributions, but tax-free growth on compounded interest replaces this benefit.

    What Is The Income Tax Impact?

    • TRADITIONAL IRA: Income tax is due on all withdrawals, and withdrawals made prior to age 59 ½ may be subject to an additional 10 percent IRS penalty.
    • ROTH IRA: The investor's contributions to the account may be withdrawn at any time. But to qualify for tax-free withdrawal of investment earnings, the account must be open for at least five years and the account owner must be at least 59 ½ or purchasing a first home. (Under the new laws, even if you've previously owned a home, you may still qualify as a first-time home buyer

    Is There An Age Limit On Distributions?

    • TRADITIONAL IRA: Distributions must start by age 70½
    • ROTH IRA: There is NO requirement to begin withdrawals at age 70½

    Is There a Roth IRA Early Withdrawal Penalty?

    Not on your contributions, but any earnings withdrawn before the account has been open for at least five years, and/or are not used for one of the qualified distributions, is subject to tax and a 10% IRS penalty.

    Qualified distributions are:

    • Made on or after you attain age 59½
    • Made to a beneficiary
    • Made if you become disabled
    • For a qualified first-time home buyer

    Qualified Employer Plan-to-Roth IRA Rollovers

    Effective January 1, 2008, qualified retirement plan participants may now request a direct rollover of their plan assets to a Roth IRA. To be eligible the current traditional IRA to Roth IRA conversion rules apply. The participants modified adjusted gross income (MAGI), whether filling singly or jointly, may not exceed $100,000. Also, a married individual may not convert unless he/she files a joint federal income tax return. Compensation or earned income is not required, nor are there any age restrictions. (Note that the $100,000 MAGI limit and the joint filing requirement for married individuals will no longer apply for conversions occurring after December 31, 2009.)

    Plan participants who meet their plans requirements, spouse beneficiaries of deceased plan participants, and spouses awarded some or all of a plan participant's assets through a divorce settlement, may take advantage of this new law.

    Moving pretax assets to a Roth IRA is a taxable transaction. Some transaction flexibility is possible, however, allowing an individual to roll any combination of pretax and after-tax assets to a traditional IRA, a Roth IRA, or a combination of the two.

    Designated Roth Account-to-Roth IRA Rollovers

    Effective January 1, 2006, 401(k) and 403(b) plans may allow participants to make salary deferrals to designated Roth accounts within the plan. Under IRC Section 402A, an employer can amend an IRC Section 401(k) plan or a tax-sheltered annuity plan under IRC Section 403(b) to permit its employees to designate their salary deferrals as Roth contributions.

    Like Roth IRA contributions, salary deferrals designated as Roth contributions are not deducted or excluded from income going into a plan and are potentially nontaxable upon distribution. These salary deferrals and earnings attributable are held within the plan in what are referred to as designated Roth accounts. Distributions of these Roth salary deferrals, plus attributable earnings, are eligible for rollover to another 401(k) plan, a 403(b) plan or a Roth IRA.

    Rollover Taxation

    Rollovers of designated Roth account assets to a Roth IRA are nontaxable.

    Subsequent Roth IRA Distributions

    A qualified distribution from a designated Roth account is:

    • Made after five-year holding period has expired; and
    • Made on or after the date the Roth 401(k) or 403(b) plan participant attains age 59½; and
    • Made to a beneficiary after the plan participant's death, or is attributable to the plan participant being disabled within the meaning of IRC Section 72(m)(7) - however, a non-spouse beneficiary of a designated Roth account is not eligible to elect a direct rollover.
    • All assets in a qualified distribution that are rolled over to a Roth IRA are considered regular Roth IRA contributions for ordering rule purposes.  The remainder is considered regular contributions.
    • Roth IRA assets are not eligible for rollover to a designated Roth IRA account.  The recipient must report designated Roth account rollover transactions on his/her federal income tax return, generally offsetting the amounts received by the amounts rolled over to Roth IRAs.

    Roth IRA Frequently Asked Questions

    Q: What if I'm covered by a retirement plan at work?

    A: Coverage you may have with other retirement plans does not affect your eligibility to make a Roth IRA contribution.

    Q: What if I have a SIMPLE or SEP IRA?

    A: You are still eligible to make a Roth IRA contribution.

    Q: Can I move all or part of my Traditional IRA to a Roth IRA?

    A: Yes, but you must have an adjusted gross income of less than $100,000. You are taxed on the rollover amount of the taxable portion of the Traditional IRA. The funds are not subject to the 10% IRS penalty tax.

    Q: How do I know if a Roth IRA is right for me?

    A: We recommend you consult with your accountant or financial advisor to determine if a Roth IRA is right for you.

    Q: How do I invest my IRA dollars?

    A: There are no special requirements for Roth IRA investments. Your choices range from federally insured Certificates of Deposit to more aggressive non-insured investment products.

    Q: Is there a benefit to starting my Roth IRA now?

    A: Yes, the sooner your funds start working for you, the more your Roth IRA will be worth at retirement. Also, the five-year rule for qualified distributions begins when the first Roth IRA is opened.

    Q: Can I move my Roth IRA from another financial institution to this bank?

    A: You may move your Roth IRA from somewhere else to this bank. The five years begin when you open your first account. So, if you open it at another institution in 2006 and move it to our bank in the year 2008, we count the date the original account was opened (2006). Thus, you would be eligible for a qualified distribution in the year 2011.


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