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2.   Roth IRAs

Table of Contents

What's New for 2008

Roth IRA contribution limit. If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2008 is generally the lesser of:

  • $5,000, or

  • Your taxable compensation for the year.

If you were age 50 or older before 2009 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2008 is generally the lesser of:

  • $6,000, or

  • Your taxable compensation for the year.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in this chapter.

Modified AGI limit for Roth IRA contributions increased. For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations.

  • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $159,000. You cannot make a Roth IRA contribution if your modified AGI is $169,000 or more.

  • Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2008 and your modified AGI is at least $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more.

  • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

See Can You Contribute to a Roth IRA? in this chapter.

Rollovers from other retirement plans. Beginning in 2008, you can rollover amounts from a qualified retirement plan to a Roth IRA. For more information, see Rollover From Employer's Plan Into a Roth IRA in this chapter.

Economic stimulus payments. Economic stimulus payments directly deposited in your Roth IRA in 2008 may be withdrawn tax-free and penalty-free. See Tax-free withdrawals of economic stimulus payments under Are Distributions Taxable? later.

Military death gratuities and servicemembers' group life insurance (SGLI) payments. If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you may roll over some or all of the amount received to your Roth IRA. For more information, see Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments in this chapter.

Rollover of Exxon Valdez settlement income. If you received qualified settlement income in connection with the Exxon Valdez litigation, you may roll over the amount received, or part of the amount received, to your Roth IRA. For more information, see Rollover of Exxon Valdez Settlement Income in this chapter.

Rollover of airline payments. If you are a qualified airline employee, you may contribute any portion of an airline payment paid to you by a commercial passenger airline carrier under a Federal bankruptcy court order to your Roth IRA. For more information, see Rollover of Airline Payments in this chapter.

What's New for 2009

Modified AGI limits for Roth IRA contributions increased. For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

  • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.

  • Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

  • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

See Can You Contribute to a Roth IRA ? in this chapter.

Temporary waiver of required minimum distribution rules. No minimum distribution is required from your Roth IRA for 2009. See Temporary waiver of required minimum distribution rules for 2009 in this chapter.

Reminder

Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA.For this purpose, a “qualified employer plan” includes:

  • A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),

  • A qualified employee annuity plan (section 403(a) plan),

  • A tax-sheltered annuity plan (section 403(b) plan), and

  • A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Introduction

Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA.

Contributions not reported.   You do not report Roth IRA contributions on your return.

What Is a Roth IRA?

A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined below). It can be either an account or an annuity. Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Set Up.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.

Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.

Traditional IRA.   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. Traditional IRAs are discussed in chapter 1.

When Can a Roth IRA Be Set Up?

You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited. See When Can You Make Contributions , later under Can You Contribute to a Roth IRA.

Can You Contribute to a Roth IRA?

Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:

  • $169,000 for married filing jointly or qualifying widow(er),

  • $116,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and

  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

You may be eligible to claim a credit for contributions to your Roth IRA. For more information, see chapter 5.
Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age.

Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $169,000.

Compensation.   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, and taxable alimony and separate maintenance payments. For more information, see What Is Compensation? under Who Can Set Up a Traditional IRA? in chapter 1.

Modified AGI.   Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.

  1. Subtracting the following.

    1. Roth IRA conversions included on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Conversions are discussed under Can You Move Amounts Into a Roth IRA, later.

    2. Roth IRA rollovers from qualified retirement plans included on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

    3. Minimum required distributions from IRAs (for conversions and rollovers from qualified retirement plans only).

  2. Add the following deductions and exclusions:

    1. Traditional IRA deduction,

    2. Student loan interest deduction,

    3. Tuition and fees deduction,

    4. Domestic production activities deduction,

    5. Foreign earned income exclusion,

    6. Foreign housing exclusion or deduction,

    7. Exclusion of qualified bond interest shown on Form 8815, and

    8. Exclusion of employer-provided adoption benefits shown on Form 8839.

  You can use Worksheet 2-1 to figure your modified AGI.

Do not subtract conversion income or minimum required distributions from IRAs when figuring your other AGI-based phaseouts and taxable income, such as your deduction for medical and dental expenses. Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes.

How Much Can Be Contributed?

The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.

Table 2-1. Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI).

IF you have taxable compensation
and your filing status is ... 		AND your modified AGI is ... THEN ...
married filing jointly or
qualifying widow(er)		 less than $159,000 you can contribute up to $5,000 ($6,000 if you are age 50 or older) as explained under How Much Can Be Contributed .
at least $159,000
but less than $169,000 		the amount you can contribute is reduced as explained under Contribution limit reduced .
$169,000 or more you cannot contribute to a Roth IRA.
married filing separately and
you lived with your spouse at any
time during the year 		zero (-0-) you can contribute up to $5,000 ($6,000 if you are age 50 or older) as explained under How Much Can Be Contributed .
more than zero (-0-)
but less than $10,000 		the amount you can contribute is reduced as explained under Contribution limit reduced .
$10,000 or more you cannot contribute to a Roth IRA.
single,
head of household,
or married filing separately and
you did not live with your spouse
at any time during the year 		less than $101,000 you can contribute up to $5,000 ($6,000 if you are age 50 or older) as explained under How Much Can Be Contributed .
at least $101,000
but less than $116,000 		the amount you can contribute is reduced as explained under Contribution limit reduced .
$116,000 or more you cannot contribute to a Roth IRA.

Note. You may be able to contribute up to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. See Catch-up contributions in certain employer bankruptcies , later.



For 2009, the amounts in Table 2-1 increase. For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

  • Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.

  • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

  • Your filing status is different than either of those described above and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

Roth IRAs only.   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:

  • $5,000 ($6,000 if you are age 50 or older), or

  • Your taxable compensation.

  This limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies later.

  However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced .

Roth IRAs and traditional IRAs.   If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit.

  This means that your contribution limit is the lesser of:

  • $5,000 ($6,000 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or

  • Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

  This limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year. For more information, see Catch-up contributions in certain employer bankruptcies later.

  However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced .

  Simplified employee pensions (SEPs) are discussed in Publication 560. Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 3.

Catch-up contributions in certain employer bankruptcies.   If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy, you may be able to contribute an additional $3,000 to your Roth IRA. For this to apply, the following conditions must be met.

  • You must have been a participant in a 401(k) plan under which the employer matched at least 50% of your contributions to the plan with stock of the company.

  • You must have been a participant in the 401(k) plan 6 months before the employer went into bankruptcy.

  • The employer (or a controlling corporation) must have been a debtor in a bankruptcy case in an earlier year.

  • The employer (or any other person) must have been subject to indictment or conviction based on business transactions related to the bankruptcy.

If you choose to make these catch-up contributions, the higher contribution limits for individuals who are age 50 or older do not apply. The most that can be contributed to your Roth IRA is the smaller of $8,000 or your taxable compensation for the year.
Repayment of reservist, hurricane, disaster recovery assistance, and recovery assistance distributions.   You can repay qualified reservist, qualified hurricane, qualified disaster recovery assistance, and qualified recovery assistance distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. However, the total repayments cannot be more than the amount of your distribution.

Note.

If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. If you make repayments of qualified hurricane, qualified disaster recovery assistance, or qualified recovery assistance distributions to a Roth IRA, the repayment is first considered to be a repayment of earnings. Any repayments of qualified hurricane, qualified disaster recovery assistance, or qualified recovery assistance distributions in excess of earnings will increase your basis in the Roth IRA by the amount of the repayment in excess of earnings. For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 and chapter 4, Disaster-Related Relief .

Contribution limit reduced.   If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Use Table 2-1 to determine if this reduction applies to you.

Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.

1. Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 36 1.  
2. Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA, a rollover from a qualified retirement plan to a Roth IRA, and a minimum required distribution from an IRA (for conversions and rollovers from qualified retirement plans only) 2.  
3. Subtract line 2 from line 1 3.  
4. Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 31 4.  
5. Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 32 5.  
6. Enter any tuition and fees deduction from Form 1040, line 34 or Form 1040A, line 19 6.  
7. Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 33 7.  
8. Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 8.  
9. Enter any foreign housing deduction from Form 2555, line 50 9.  
10. Enter any excludable qualified savings bond interest from Form 8815, line 14 10.  
11. Enter any excluded employer-provided adoption benefits from Form 8839, line 30 11.  
12. Add the amounts on lines 3 through 11 12.  
13. Enter:

  • $169,000 if married filing jointly or qualifying widow(er),

  • $10,000 if married filing separately and you lived with your spouse at any time during the year, or

  • $116,000 for all others

 13.  
Is the amount on line 12 more than the amount on line 13?
If yes, see the note below.
If no, the amount on line 12 is your modified adjusted gross income for Roth IRA purposes. 		   
  Note. If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. When figuring your modified AGI for conversion purposes, refigure your AGI without taking into account any income from conversions or minimum required distributions from IRAs. (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI.) Then go to list item 2 under Modified AGI earlier or line 3 above in Worksheet 2-1 to refigure your modified AGI. If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above.
Figuring the reduction.   If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

  1. Start with your modified AGI.

  2. Subtract from the amount in (1):

    1. $159,000 if filing a joint return or qualifying widow(er),

    2. $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or

    3. $101,000 for all other individuals.

  3. Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return and you lived with your spouse at any time during the year).

  4. Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).

  5. Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

  You can use Worksheet 2-2 to figure the reduction.

Worksheet 2-2. Determining Your Reduced Roth IRA Contribution Limit

Before using this worksheet, check Table 2-1 to determine whether or not your Roth IRA contribution limit is reduced. If it is, use this worksheet to determine how much it is reduced.

1. Enter your modified AGI for Roth IRA purposes 1.  
2. Enter:

  • $159,000 if filing a joint return or qualifying widow(er),

  • $-0- if married filing a separate return and you lived with your spouse at any time in 2008, or

  • $101,000 for all others

 2.  
3. Subtract line 2 from line 1 3.  
4. Enter:

  • $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or

  • $15,000 for all others

 4.  
5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 5.  
6. Enter the lesser of:

  • $5,000 ($6,000 if you are age 50 or older, or $8,000 for certain employer bankruptcies), or

  • Your taxable compensation

 6.  
7. Multiply line 5 by line 6 7.  
8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200 8.  
9. Enter contributions for the year to other IRAs 9.  
10. Subtract line 9 from line 6 10.  
11. Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit 11.  

Round your reduced contribution limit up to the nearest $10. If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200.

Example.

You are a 45-year-old, single individual with taxable compensation of $113,000. You want to make the maximum allowable contribution to your Roth IRA for 2008. Your modified AGI for 2008 is $102,000. You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $5,000. Using the steps described earlier, you figure your reduced Roth IRA contribution of $4,670 as shown on the following worksheet.


Worksheet 2-2. Example—Illustrated

Before using this worksheet, check Table 2-1 to determine whether or not your Roth IRA contribution limit is reduced. If it is, use this worksheet to determine how much it is reduced.

1. Enter your modified AGI for Roth IRA purposes 1. 102,000
2. Enter:

  • $159,000 if filing a joint return or qualifying widow(er),

  • $-0- if married filing a separate return and you lived with your spouse at any time in 2008, or

  • $101,000 for all others

 2. 101,000
3. Subtract line 2 from line 1 3. 1,000
4. Enter:

  • $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or

  • $15,000 for all others

 4. 15,000
5. Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 5. .067
6. Enter the lesser of:

  • $5,000 ($6,000 if you are age 50 or older, or $8,000 for certain employer bankruptcies), or

  • Your taxable compensation

 6. 5,000
7. Multiply line 5 by line 6 7. 335
8. Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200 8. 4,670
9. Enter contributions for the year to other IRAs 9. 0
10. Subtract line 9 from line 6 10. 5,000
11. Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit 11. 4,670

When Can You Make Contributions?

You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).

You can make contributions for 2008 by the due date (not including extensions) for filing your 2008 tax return. This means that most people can make contributions for 2008 by April 15, 2009.

What if You Contribute Too Much?

A 6% excise tax applies to any excess contribution to a Roth IRA.

Excess contributions.   These are the contributions to your Roth IRAs for a year that equal the total of:

  1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed ), plus

  2. Any excess contributions for the preceding year, reduced by the total of:

    1. Any distributions out of your Roth IRAs for the year, plus

    2. Your contribution limit for the year minus your contributions to all your IRAs for the year.

Withdrawal of excess contributions.   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

Applying excess contributions.    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.

Can You Move Amounts Into a Roth IRA?

You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA.

Conversions

You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. However, the 1-year waiting period does not apply.

Conversion methods.   You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways.

  • Rollover. You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution.

  • Trustee-to-trustee transfer. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.

  • Same trustee transfer. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Same trustee.   Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.

More information.   For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1.

Rollover From Employer's Plan Into a Roth IRA

Prior to 2008, you could only roll over (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. Beginning in 2008, you can roll over into a Roth IRA all or part of an eligible rollover distribution your receive from your (or your deceased spouse's):

  • Employer's qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),

  • Annuity plan,

  • Tax-sheltered annuity plan (section 403(b) plan), or

  • Governmental deferred compensation plan (section 457 plan).

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

Income.   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid.

Example.

In July of 2008, you decide to roll over $50,000 from your 401(k) plan to your Roth IRA. You have no after-tax contributions. For 2008, you must include in income $50,000.

If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.
Rollover methods.   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways.

  • Rollover. You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Since the distribution is paid directly to you, the payer generally must withhold 20% of it.

  • Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA.

  For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1.

How to report.   A rollover to a Roth IRA is not a tax-free distribution other than any after-tax contributions you made. Report a rollover from a qualified retirement plan to a Roth IRA on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b.

  Enter the total amount of the distribution before income tax or deductions were withheld on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount is shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments

If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. The contribution is treated as a qualified rollover contribution.

The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers.

The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. However, if you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, and before June 17, 2008, you have until June 17, 2009, to make the contribution to your Roth IRA.

The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.

Failed Conversions and Rollovers

If, when you converted amounts from a traditional IRA or SIMPLE IRA into a Roth IRA or when you rolled over amounts from a qualified retirement plan into a Roth IRA, you expected to have modified AGI of $100,000 or less and a filing status other than married filing separately, but your expectations did not come true, you have made a failed conversion or failed rollover.

Results of failed conversions and failed rollovers.   If the converted or rolled over amount (contribution) is not recharacterized (explained in chapter 1), the contribution will be treated as a regular contribution to the Roth IRA and subject to the following tax consequences.

  • A 6% excise tax per year will apply to any excess contribution not withdrawn from the Roth IRA.

  • The distributions from the traditional IRA or qualified retirement plan must be included in your gross income.

  • The 10% additional tax on early distributions may apply to any distribution.

How to avoid.   You must move the amount converted or rolled over (including all earnings from the date of conversion or roll over) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion or roll over to the Roth IRA. You do not have to include this distribution (withdrawal) in income.

Rollover From a Roth IRA

You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers.

A rollover from a Roth IRA to an employer retirement plan is not allowed.

A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA.

Rollover of Exxon Valdez Settlement Income

If you are a qualified taxpayer and you received qualified settlement income, you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be:

  • Included in your taxable income for the year the qualified settlement income was received, and

  • Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.

For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1.

Rollover of Airline Payments

If you are a qualified airline employee, you may contribute any portion of an airline payment you receive to a Roth IRA. The contribution must be made within 180 days from the date you received the payment, or before June 23, 2009, whichever is later. The contribution will be treated as a qualified rollover contribution and the modified AGI limits that generally apply to Roth IRA rollovers do not apply to airline payments. The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA.

Airline payment.   An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. The payment also must be made both:

  • Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and

  • In respect of the qualified airline employee's interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount.

An airline payment amount shall not include any amount payable on the basis of the carrier's future earnings or profits.

Qualified airline employee.   A qualified airline employee is an employee or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006.

  For more information, see Form 8935, Airline Payment Report. This form will be sent to you within 90 days following an airline payment, or by March 23, 2009, whichever is later. The form will indicate the amount of the airline payment that is eligible to be rolled over to a Roth IRA.

Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions , later.

Basis of distributed property.   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

Withdrawals of contributions by due date.   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

  2. The payment or distribution is:

    1. Made on or after the date you reach age 59½,

    2. Made because you are disabled,

    3. Made to a beneficiary or to your estate after your death, or

    4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

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Is Roth Distributions a Qualified Distribution?

Additional Tax on Early Distributions

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

Distributions of conversion and certain rollover contributions within 5-year period.   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income. A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the amount, if any, of the distribution that is attributable to the part of the conversion or rollover contribution that you had to include in income.

  The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier.

  For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2008, and makes a regular contribution for 2007 on the same date, the 5-year period for the conversion begins January 1, 2008, while the 5-year period for the regular contribution begins on January 1, 2007.

  Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

  You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions.   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions.   You may not have to pay the 10% additional tax in the following situations.

  • You have reached age 59½.

  • You are disabled.

  • You are the beneficiary of a deceased IRA owner.

  • You use the distribution to pay certain qualified first-time homebuyer amounts.

  • The distributions are part of a series of substantially equal payments.

  • You have significant unreimbursed medical expenses.

  • You are paying medical insurance premiums after losing your job.

  • The distributions are not more than your qualified higher education expenses.

  • The distribution is due to an IRS levy of the qualified plan.

  • The distribution is a qualified reservist distribution.

  • The distribution is a qualified disaster recovery assistance distribution.

  • The distribution is a qualified recovery assistance distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions .

Tax-free withdrawal of economic stimulus payments.    You may choose to withdraw an economic stimulus payment that was directly deposited to your Roth IRA in 2008. If you choose to withdraw any or all of the payment, that portion of the payment is treated as neither contributed nor distributed from your IRA. The amount withdrawn is not included in your income and is not subject to additional tax or penalty. The withdrawal must be made by the due date for filing your 2008 tax return, including extensions. For most people that would be April 15, 2009.

  If you do withdraw all or part of the payment from your IRA, you will receive a Form 1099-R showing the amount of the distribution. Include the distribution on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a. Do not make an entry on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b, but enter “ESP” in the space next to the line. For more information see the instructions for your tax return.

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much . Order the distributions as follows.

  1. Regular contributions.

  2. Conversion and rollover contributions, on a first-in-first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules , later. Take these conversion and rollover contributions into account as follows:

    1. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the

    2. Nontaxable portion.

  3. Earnings on contributions.

Disregard rollover contributions from other Roth IRAs for this purpose.

Aggregation (grouping and adding) rules.   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows.

  • Add all distributions from all your Roth IRAs during the year together.

  • Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years.

  • Add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2008 and the conversion or rollover contribution is made in 2009, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2009.

Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA.

  Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose.

Example.

On October 15, 2003, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis.

Justin included $60,000 ($80,000 − $20,000) in his gross income.

On February 23, 2008, Justin made a regular contribution of $5,000 to a Roth IRA. On November 7, 2008, at age 60, Justin took a $7,000 distribution from his Roth IRA.

The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income.

The next $2,000 of the distribution is not includible in income because it was included previously.

How Do You Figure the Taxable Part?

To figure the taxable part of a distribution that is not a qualified distribution, complete Worksheet 2-3.

Worksheet 2-3. Figuring the Taxable Part of a Distribution (Other Than a Qualified Distribution) From a Roth IRA

1. Enter the total of all distributions made from your Roth IRA(s) (other than qualified charitable distributions or a one-time distribution to fund an HSA) during the year 1.  
2. Enter the amount of qualified distributions made during the year 2.  
3. Subtract line 2 from line 1 3.  
4. Enter the amount of distributions made during the year to correct excess contributions made during the year. (Do not include earnings.) 4.  
5. Subtract line 4 from line 3 5.  
6. Enter the amount of distributions made during the year that were contributed to another Roth IRA in a qualified rollover contribution (other than a repayment of a qualified disaster recovery assistance or recovery assistance distribution) 6.  
7. Subtract line 6 from line 5 7.  
8. Enter the amount of all prior distributions from your Roth IRA(s) (other than qualified charitable distributions or a one-time distribution to fund an HSA) whether or not they were qualified distributions 8.  
9. Add lines 3 and 8 9.  
10. Enter the amount of the distributions included on line 8 that were previously includible in your income 10.  
11. Subtract line 10 from line 9 11.  
12. Enter the total of all your contributions to all of your Roth IRAs 12.  
13. Enter the total of all distributions made (this year and in prior years) to correct excess contributions. (Include earnings.) 13.  
14. Subtract line 13 from line 12. (If the result is less than 0, enter 0.) 14.  
15. Subtract line 14 from line 11. (If the result is less than 0, enter 0.) 15.  
16. Enter the smaller of the amount on line 7 or the amount on line 15. This is the taxable part of your distribution 16.  

Must You Withdraw or Use Assets?

You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death .

Minimum distributions.   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. See Distributions to beneficiaries , later.

Recognizing Losses on Investments

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Distributions After Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can You Withdraw or Use Assets? in chapter 1.

Distributions to beneficiaries.   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1.) If you are a beneficiary receiving distributions over a 5-year period, you can waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.

  If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

  If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Temporary waiver of required minimum distribution rules for 2009.    No minimum distributions are required for 2009. The waiver applies to post-death minimum distributions required for Roth IRA beneficiaries in the same way it applies to traditional IRA beneficiaries. See Temporary waiver of required minimum distribution rules for 2009 in chapter 1.

Combining with other Roth IRAs.   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either:

  • Inherited the other Roth IRA from the same decedent, or

  • Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA.

Distributions that are not qualified distributions.   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.

  If the owner of a Roth IRA dies before the end of:

  • The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or

  • The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA,

each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable.

Example.

When Ms. Hibbard died in 2008, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2004, and earnings of $2,000. No distributions had been made from her IRA. She had no basis in the conversion contribution in 2004.

When she established her Roth IRA, she named each of her 4 children as equal beneficiaries. Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings.

In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2008. The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner.

Tax on excess accumulations (insufficient distributions).   If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion.

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