Roth IRAs Regardless of your age, you may be able to establish and make nondeductible contributions to a retirement plan called a Roth IRA. You can make contributions for 2001 by the due date (not including extensions) for filing your 2001 tax return. This means that most people can make contributions for 2001 by April 15, 2002. Contributions not reported. You do not have to 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 Publication 590. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. 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 70 1/2 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. Can I 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: $160,000 for married filing jointly, $10,000 for married filing separately and you lived with your spouse at any time during the year, and $110,000 for single, head of household, qualifying widow(er) or married filing separately and you did not live with your spouse at any time during the year. Is there an age limit for contributions? Contributions can be made to your Roth IRA regardless of your age. Can I contribute to a Roth IRA for my spouse? You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit (discussed in How Much Can Be Contributed? under Traditional IRAs) and your modified AGI is less than: $160,000 for married filing jointly, $10,000 for married filing separately and you lived with your spouse at any time during the year, and $110,000 for married filing separately and you did not live with your spouse at any time during the year. Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, and taxable alimony and separate maintenance payments. Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows. Subtract any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (conversion income). Add the following deductions and exclusions: Traditional IRA deduction, Student loan interest deduction, Foreign earned income exclusion, Foreign housing exclusion or deduction, Exclusion of qualified savings bond interest shown on Form 8815, and Exclusion of employer-paid adoption expenses shown on Form 8839. You can use Worksheet 18-2 to figure your modified AGI. Worksheet 18-2. 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 (Form 1040, line 33 or Form 1040A, line 19) 1.      2. Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA 2.      3. Subtract line 2 from line 1 3.      4. Enter any traditional IRA deduction (Form 1040, line 23 or Form 1040A, line 16) 4.      5. Enter any student loan interest deduction (Form 1040, line 24 or Form 1040A, line 17) 5.      6. Enter any foreign earned income exclusion (Form 2555, line 40 or Form 2555-EZ, line 18) 6.      7. Enter any foreign housing exclusion or deduction (Form 2555, line 34 or 48) 7.      8. Enter any exclusion of bond interest (Form 8815, line 14) 8.      9. Enter any exclusion of employer-paid adoption expenses (Form 8839, line 26) 9.      10. Add the amounts on line 3 through 9. This is your modified adjusted gross income for Roth IRA purposes 10.      How Much Can Be Contributed? The contribution limit for Roth IRAs depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. Roth IRAs only. If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if you are 50 or older), or Your taxable compensation. 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 (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. This means that your contribution limit is the lesser of: $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if you are 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. 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 chapter 3 of Publication 590. Savings incentive match plans for employees (SIMPLE) are discussed in chapter 4 of Publication 590. Contribution limit reduced. If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Use Table 18-3 to determine if this reduction applies to you. Figuring the reduction. If the amount you can contribute to your Roth IRA is reduced, see Publication 590 for how to figure the reduction. Table 18-3.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 Less than $150,000 You can contribute up to $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if age 50 or older). At least $150,000 but less than $160,000 The amount you can contributed is reduced as explained under Contribution limit reduced. $160,000 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 $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if 50 or older). 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, Qualifying Widow(er), or Married Filing Separately and you did not live with your spouse at any time during the year Less than $95,000 You can contribute up to $2,000 for 2001 ($3,000 for 2002 or $3,500 for 2002 if age 50 or older). At least $95,000 but less than $110,000 The amount you can contribute is reduced as explained under Contribution limit reduced. $110,000 or more You cannot contribute to a Roth IRA. When Can I 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). What If I 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: 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, as described later) that are more than your contribution limit for the year, plus Any excess contributions for the preceding year, reduced by the total of: Any distributions out of your Roth IRAs for the year, plus 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 applies only if any earnings on the contributions are also withdrawn and are reported as income earned and receivable in the year the 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 I 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 recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from one Roth IRA to another Roth IRA. Conversions You can convert a traditional IRA or a SIMPLE 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 under Rollover From One IRA Into Another under Traditional IRAs, earlier, 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. Converting from any traditional IRA. You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met. Your modified AGI (explained earlier) is not more than $100,000. You are not a married individual filing a separate return. (See Lived apart from spouse under Filing status, earlier.) Required distributions. Amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70 1/2) under the required distribution rules (discussed under Traditional IRAs, earlier) cannot be converted. Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA. Income. You must include in your gross income distributions from a traditional IRA that you would have to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed earlier under Traditional IRAs. If you must include any amount in your gross income, you may have to make estimated tax payments. See chapter 5. How to treat 1998 conversions. If you converted amounts from a traditional IRA in 1998 to a Roth IRA, any amount you had to include in income as a result of the distribution is generally included ratably over a 4-year period, beginning with 1998. This means you included one-quarter of the amount in income in 1998, 1999, 2000, and must include the final one-quarter in 2001. Death of Roth IRA owner during 4-year period. If a Roth IRA owner who is including amounts ratably over the 4-year period died in 2001, any amounts not included must generally be included in the owner's (decedent's) gross income for 2001. Note. You may have elected to include the entire amount in income in 1998. If you did, this discussion does not apply to you. Converting from a SIMPLE IRA. Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained earlier under Converting from any traditional IRA. However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer. More information. For more detailed information on conversions, see Publication 590. 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 explained under Rollover From One IRA Into Another under Traditional IRAs, earlier, apply to these rollovers. Failed Conversions If, when you converted amounts from a traditional IRA or SIMPLE IRA (including a transfer by redesignation) into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but events changed these facts, you have made a failed conversion. Adverse consequences. If the converted amount (contribution) is not recharacterized (explained later), 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 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 (including all earnings from the date of conversion) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion to the Roth IRA. You do not have to include this distribution (withdrawal) in income. See Recharacterizations, next, for more information. Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. More detailed information is in Publication 590. No deduction allowed. No deduction is allowed for the contribution to the first IRA and any net income transferred with the recharacterized contribution is treated as earned in the second IRA. How to recharacterize a contribution. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. It will be treated as having been made to the second IRA on the same date that it was actually made to the first IRA. Required notifications. To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA that you have elected to treat, for federal tax purposes, the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information. The type and amount of the contribution to the first IRA that is to be recharacterized. The date on which the contribution was made to the first IRA and the year for which it was made. A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income allocable to the contribution to the trustee of the second IRA. If there was a loss while the contribution was in the first IRA, the net income that must be transferred may be a negative amount. The name of the trustee of the first IRA and the name of the trustee of the second IRA. Any additional information needed to make the transfer. Note. If the trustee of your first IRA is unable to calculate the amount of net income you must transfer, get IRS Notice 2000-39. The notice explains the IRS-approved method of calculating the amount you must transfer. Reporting a recharacterization. If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. You must treat the contribution as having been made to the second IRA. Are Distributions From My Roth IRA 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. What are qualified distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. It is made after the 5-taxable-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59 1/2, Made because you are disabled, Made to a beneficiary or to your estate after your death, or To pay certain qualified first-time homebuyer amounts discussed in Publication 590. Additional tax on distributions of conversion contributions within 5-year period. If, within the 5-year period starting with the year in which you made a conversion contribution of an amount from a traditional IRA to a Roth IRA, you take a distribution from a Roth IRA of an amount attributable to the portion of the conversion contribution that you had to include in income, you generally must pay the 10% additional tax on early distributions. (See Ordering Rules for Distributions, later, to determine the amount, if any, of the distribution that is attributable to the conversion contribution.) The 5-year period is separately determined for each conversion contribution. Additional tax on other early distributions. The taxable part of other distributions from your Roth IRA(s) that are not qualified distributions is subject to the additional tax on early distributions. See Publication 590 for more information. 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 earnings are considered to be distributed from your Roth IRA. Regular contributions are distributed first. See Publication 590 for more information. Am I required to take distributions when I reach age 70 1/2? 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. More information. For more detailed information on Roth IRAs, see Publication 590.