How (Almost) Everyone Can Have a Roth IRA


What’s the Benefit of a Roth IRA?

The benefit of having a Roth IRA is that if the account is open for at least 5 years and the account owner is at least 59 1/2, then all of the distributions from the Roth IRA are tax-free.  Additionally, unlike IRA’s, Roth IRA’s are not subject to the Required Minimum Distribution Rules (“RMD”) for either the taxpayer or the surviving spouse.  This allows for the account to grow and is a great wealth transfer tool.  Non-spouse beneficiaries (children or grandchildren) are subject to the RMD rules however once they inherit the Roth IRA.

Who is Eligible?

To have a Roth IRA you must pass two tests.  First, you must have earned income at least up to the contribution amount. Taxpayers are allowed to contribute up to $5,000 per year.  Taxpayers over age 50 can make an additional ‘catch-up’ contribution of $1,000 for a total of $6,000. Earned income is from wages as an employee (Form W-2) and from self-employed income from a sole-proprietorship or partnership. Second, your income can’t exceed a certain threshold.  For married couples filing a joint return, they can’t fund a Roth IRA in 2012 when their Modified Adjusted Gross Income exceeds $183,000. Taxpayers can’t fund an IRA once they are 70 1/2.  There is no age restriction on a Roth IRA however. Taxpayers over age 70 with earned income can contribute to a Roth IRA.


What if I’m not Eligible?

You or your spouse must have earned income.  If you don’t have earned income, you aren’t eligible for a Roth IRA.

If you have earned income but your income is too high, you can still have a Roth IRA.  For taxpayers whose income is too high they will need to fund a traditional IRA and then immediately do a Roth Conversion.


Is There More Paperwork with a Roth Conversion?

Yes, there is. You will have to open an IRA and then a Roth IRA. There will also be additional income tax forms to complete.  IRS Form 8606, Nondeductible IRA’s, will need to completed and attached to your income tax return.

Caution needs to be exercised.  If you are considering this approach, the key will be whether you have any other IRA’s. If you have other IRA’s you will have to run the numbers before you do the Roth Conversion. Roth Conversions are taxed on a pro-rata basis on all of your IRA’s.  Some taxpayers may find it’s not worth it due to the income tax due.


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Tom Scanlon, CPA, CFP® has over thirty-five years experience in public accounting with an extensive background in the areas of financial, tax and estate planning.

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