WIA Financial Associates
...............Let us help you take control of your future

ROTH IRA
Taxpayers of any age who have earned income are eligible to  make a non deductible contribution of $2,000 (reduced by any regular IRA contributions).  Eligibility is phased out (i.e.: the $2,000 contribution limit is lowered) for taxpayers with incomes above certain limits.  These are as follows; single taxpayers with AGI between $95,000 and $110,000 and for joint filers with AGI between $150,000 and $160,000.

Questions and Answers About ROTH IRAS
The Taxpayer Relief Act of 1997 expanded eligibility for Individual Retirement Annuities (IRAs) and created a new choice - the Roth IRA.  Here are some Q&A to help you sort out the new options available to you. 

Question: How does the new Roth IRA work?
Answer: Individuals make non-deductible IRA contributions of up to $2,000 per year, and generally receive tax-free distributions. They may withdraw nondeductible contributions tax-free at any time. The distribution of earnings is tax-free if the individual has participated in the Roth IRA for at least five years and the distribution meets one of the following qualifications:

1. used to buy a first home (up to $10,000)
2. made to a beneficiary after the individual's death
3. attributable to the individual becoming disabled o received after age 59 1/2

Question: What are the eligibility requirements for a Roth IRA?
Answer: Taxpayers of any age who have earned income are eligible to contribute. Eligibility is phased out for single taxpayers with AGI between $95,000 and $110,000 and for joint filers with AGI between $150,000 and $160,000. Individuals and couples in the phase-out range may make smaller contributions.

Question: Can a participant in an employer-sponsored retirement plan, including SEPs, SIMPLEs, 401(k), etc., make contributions to a Roth IRA?
Answer: Yes, provided the individual qualifies under the adjusted gross income requirement.

Question: How much can be contributed annually to a Roth IRA?
Answer: Contributions are limited to $2,000 (single) and $4,000 (joint) and they cannot exceed 100% of aggregate earned income. As long as one spouse holds a job, non-working spouses will be eligible to contribute up to $2,000. Contributions may continue beyond age 701/2, as long as the individual has earned income.

Question: How much of the Roth IRA contribution is deductible?
Answer: None of the contribution is tax deductible.

Question: When can individuals begin making contributions to a Roth IRA?
Answer: Roth IRAs were available beginning January 1, 1998.

Question: Can contributions be made to both a Roth and a traditional IRA?
Answer: Yes, however combined contributions made to Roth and traditional IRAs cannot exceed the annual $2,000 (single) or $4,000 (joint) contribution limit. In addition to nondeductible cash contributions, individuals may convert (transfer) assets from a traditional IRA to a Roth IRA.

Question: Should a client choose a traditional or Roth IRA?
Answer: Base each decision on your individual retirement planning needs and circumstances. The table below shows that individuals expecting their tax rate to either remain the same or increase by the time the money is withdrawn will benefit from the Roth IRA. However, if their tax rate drops significantly when the money is withdrawn, they may be better off with a deductible IRA. Keep in mind that due to expanded eligibility requirements, many more taxpayers will qualify for the Roth IRA than a traditional (deductible) IRA. Furthermore, in most situations it is unlikely that individuals will be in a lower tax bracket when the money is withdrawn.

Assumptions used in arriving at above values.  For illustrative purposes only.  Figures will vary should assumption change.

1. $2,000 annual IRA contribution for years 5, 10, and 20.

2. 8% annual return

3. 28% tax bracket when contribution is made and in each year until withdrawn

4. Contributions beginning of year, withdrawals end of year

5. Traditional (deductible) IRA balances assume tax savings ($560 per year) are reinvested in a taxable account with earnings taxed each year. The taxable account is combined with the IRA balance upon withdrawal.

6. No tax penalty upon withdrawal
   
   This chart is used to illustrate a comparison of the accounts and is for illustrative purposes only.  Based on current tax law, distributions may need to be taken over a period of years rather than in a lump sum to accomplish the tax bracket reflected.
   

Question: Can anyone convert a traditional IRA to a Roth IRA?
Answer: Households with adjusted gross income (AGI) below $100,000 could have begun converting their existing traditional IRAs to the new Roth IRA in 1998. (Married taxpayers who file separately cannot take advantage of this conversion provision.) For purposes of determining conversion eligibility, the balance converted is not added to AGI.

Question: What are the tax implications associated with converting an existing traditional IRA to a Roth IRA?
Answer: Individuals converting a traditional IRA to a Roth IRA, will owe ordinary income taxes on the converted earnings and deductible contributions. However, if the conversion was made before January 1, 1999, the income may be spread over a four-year period. If the IRA was converted after December 31, 1998, all taxes owed must be paid in the year of conversion. The 10% early withdrawal penalty does not apply to conversions.

Question: If individuals convert a traditional IRA to a Roth IRA, can they continue to make annual IRA contributions?
Answer:Amounts converted to a Roth IRA are added to income, therefore it may affect an individual's annual IRA eligibility to make contributions and/or take deductions.

Question: Can proceeds from a 401(k), profit sharing, or pension plan be rolled over to a Roth IRA?
Answer: Further guidance is needed from the IRS to find a clear answer to this question. Currently, the rules suggest direct conversions from qualified plans are not authorized. Therefore, individuals with a qualified plan distributions would need to roll over into a traditional IRA, then convert to a Roth IRA.

Question: Can proceeds from a SEP be rolled over to a Roth IRA?
Answer: This is not specifically addressed in the legislation. However, it seems possible to first roll proceeds to a rollover IRA and then convert to a Roth IRA. Caution: It is our belief that a technical correction will be forthcoming regarding some of these unclear issues. This is one area we anticipate receiving attention.

Question: When are individuals required to take withdrawals from a Roth IRA?
Answer: Traditional IRA minimum distribution rules are not applicable to a Roth IRA until after the owner's death. Roth IRA owners are not required to take any distributions during their lifetime. As a result, converting to a Roth IRA will provide individuals with a lifetime of unlimited tax-free accumulation and perhaps tax-free accumulation following their death for their beneficiaries. Distributions are tax-free to beneficiaries and subject to normal post-death distribution requirements. This provision offers the potential for decades of additional tax deferral beyond that offered by traditional IRAs.

Question: How are withdrawals from a Roth IRA taxed?
Answer: Withdrawals are tax-free at anytime, if they do not exceed the amounts contributed. Distributions from a Roth IRA are made on a first-in, first-out (FIFO) basis. Withdrawals taken in excess of contribution amounts (earnings) are taxed as ordinary income. All withdrawals (including earnings) are tax-free if taken after five years and meet any one of the following criteria:

Attainment of age 59 1/2
Death
Disability
First-time home purchase (up to $10,000)

Question: Should individuals convert traditional IRAs to Roth IRAs?
Answer: Maybe. Maybe not. Converting requires individuals to pay income tax on the distribution from the traditional IRA. Whether the long-term benefits of the Roth IRA will outweigh the immediate income-tax bite of conversion depends on a number of factors. Analyze and consider such factors as life stage, income, current and projected tax brackets, anticipated rate of return and the amount currently invested in tax-deductible IRAs. Individual situations can become complicated very quickly. A few simple guidelines may be helpful:

Question: How should clients pay the income tax associated with converting?
Answer: Clients converting a traditional IRA to a Roth IRA, are almost always better off paying the income tax from other savings rather than from the existing IRA. By paying the taxes separately, the money will continue to grow and the client will benefit from higher tax-free earnings.

Question: Can converted funds be commingled with ongoing Roth IRA contributions?
Answer: All traditional IRA funds converted to a Roth IRA must be segregated from ongoing contributions. For clients wishing to both convert and make additional Roth IRA contributions, a separate contract must be established for each. Furthermore, separate contracts must be established for multiple conversions.

If you would like more information on the above...or any other related topic...or answers to a specific question...please...

e mail us @ mailto:Brostek@wiafinancial.com
or call/write/fax/e fax us @

WIA Financial Associates
100 Broadhollow Road Suite 203
Farmingdale, New York  11735
(516) 249-0469 phone    (516) 249-0310 fax    

Key Contacts For All Services
     Hollie L. Brostek, QPA-President

Let us help you get your ducks in a row