Module 4: Chapter 2: Roth IRA
When considering whether to do a conversion (characterization) what do you need to remember?
Tax on a Roth Conversion is based on the account value at the time of conversion. So the lower the account value, the lower the tax bill.
If nondeductible contributions or after tax contributions are involved, what can be said about the actual conversion?
A ratio of nondeductible IRA contributions to the total value of ALL IRA's must be used. In other words, one cannot just convert the nondeductible contributions amounts. You must add all the IRAs together. You cannot separate and convert ONLY the non deductible (after-tax) contributions to avoid tax.
When does establishing a Roth IRA make sense?
Individuals who believe that their current tax rates are lower than what they will be in the future such as: A young person in an entry-level job. (They may prefer to pay taxes on the contribution now when their tax income bracket is lower, and receive tax-free distributions later when their income/bracket may be higher.) Anyone who suspects that tax rates may change for the worse in the future. Anyone who wants to shelter income and earnings from taxation after he or she reaches age 70 1/2. Traditional IRA's will not accept new contributions after 701/2. Individuals saving for a first home. Taking an early distribution without penalty makes the Roth IRA an attractive vehicle for accumulating a down payment. Individuals wanting to pass on assets tax-free to their bene's. There are no RMD's and once the five year holding period is met, benes of the account can receive tax-free distributions.
What needs to take place in order for a distribution from a Roth IRA to be considered "qualified"?
The account must have been opened for five years and the distribution must happen after age 59 1/2, death or disability or for first-time homebuyer up to $10k
When it comes to RMD's, what are some specific things to know about Roth IRA's?
They are not subject to RMD's. Unlike Traditional IRA's, as long as an individual has earned income, they can continue to contribute to a Roth IRA after 70 1/2.
What is a Roth Conversion?
A traditional IRA may be converted to a Roth IRA with no time or income restrictions. Pretax dollars are subject to ordinary income tax at the time of conversion, but are NOT subject to the 10% early withdrawal penalty, even if under age 59 1/2. (If it happens before the five year period, then the withdrawal is subject to a 10% penalty.
What is so advantageous about a Roth IRA vs. a Traditional IRA?
The main advantage lies in the tax-free treatment of distributions for the owner and the beneficiary. No deduction is available for contributions to a Roth IRA - all contributions are made with after tax dollars. Also, eligibility for making a Roth IRA contribution is subject to only the earned income requirement and annual income limitations. Doesn't matter if they have active status or age.
For Roth IRA's, what are you determining?
Eligibility based solely on income, nothing else.
If a distribution from a Roth IRA is NOT qualified, would that mean that the distribution would also be subject to the 10% early withdrawal penalty if the account owner is under age 59 1/2?
Not necessarily. The same exceptions to the 10% penalty that apply to traditional IRA's also apply to Roth IRA's. (education expenses, medical expenses in excess of 10%, periodic payments)
What is the primary advantage of converting traditional IRA accounts to Roth IRA's?
The funds will not be subject to income tax upon withdrawal - ever.
What types of assets can be converted to a Roth IRA?
Traditional IRA's, SEPs, SIMPLEs (after 2 years) and qualified plans
