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The Online Advisor - November 1998
Beware of the tax traps in the new Roth IRA
A Roth IRA can be an attractive way to save for retirement. However, if you’re interested in establishing a Roth IRA or rolling funds from your traditional IRA into a Roth IRA, be careful not to be caught in one of the many tax traps. Here are some of the important Roth IRA rules you need to know -
- You can convert a traditional IRA to a Roth IRA, but only if your adjusted gross income does not exceed $100,000. This income limit is the same whether you are single or married. Rollovers to a Roth IRA are not permitted for married taxpayers who file separate tax returns.
- When you convert a traditional IRA to a Roth IRA, you’ll owe income taxes on the funds being converted. If you want to spread the income tax consequences over a four-year period, you must complete your conversion before the end of 1998. After that, any tax due on a conversion must be paid in the year you convert.
- If you do a 1998 conversion, you may elect to include all the income in 1998 rather than spreading it over a four-year period if that is to your advantage (if you have offsetting losses in 1998, for example).
- The IRS Reform Act of 1998 gives taxpayers some IRA flexibility. If you do a conversion and then find that your income exceeds the $100,000 limit, you can transfer your funds back to a regular IRA if you do so before the due date of your tax return for the year of the conversion.
- The income limits to qualify for making a contribution to a Roth IRA differ from the rollover income limits. Eligibility begins to phase out once income reaches $95,000 for singles and heads of household and when income reaches $150,000 for couples filing jointly.
- You can have both a Roth and a traditional IRA if you like, but the total of your contributions to all IRAs (not counting education IRAs and Roth rollovers) can’t exceed $2,000 for any year.
- You can contribute to a Roth IRA after you reach age 70 1/2, and you’re not required to begin withdrawing funds from a Roth at any particular age. However, your Roth IRA must have been in existence for at least five years before you can take tax-free withdrawals from it, regardless of your age. In other words, if you start a Roth IRA at age 67, you would have to wait until age 72 to begin tax-free withdrawals, even though the required starting age for withdrawals in a traditional IRA is age 70 1/2.
Careful planning is advisable in order to avoid costly mistakes in using a Roth IRA. Call our office if you would like more information or assistance.