Roth IRA

Recommended if you:

• Want tax-free withdrawals after retirement
• Wish to have a federally-insured retirement program
• Have earned income from employment that you can invest
• Have a higher income which prohibits you from making a deductible contribution under a Traditional IRA
• Want an IRA that allows you to postpone distributions for as long as you like and allows you to continue using earned income to make contributions even after age 70 1/2

Important Facts

• Unlike the Traditional IRA, the Roth IRA contribution is not tax deductible.
• Earnings grow tax-deferred; if you do not make any withdrawals for at least five years, earnings become tax-free when you make a qualified withdrawal.
• Allowable contribution amounts are based on age and adjusted gross income.
• Early withdrawal penalties may apply.

Common Questions Regarding Roth IRAs

What Is a Roth IRA?

A Roth IRA is an individual retirement account that allows only nondeductible contributions but features tax-free withdrawals for certain distribution reasons after a five-year holding period.

The term "tax free" means free from federal income taxes.

Am I Eligible for a Roth IRA?

There are two requirements for eligibility to contribute to a Roth IRA: you must have compensation (or your spouse must have compensation) and your modified adjusted gross income (MAGI) cannot exceed certain limits (see tables below).

How Much Can I Contribute Each Year?

You may contribute any amount up to the lesser of 100 percent of your compensation or the maximum contribution amount (MCA), if your MAGI is within prescribed limits. These prescribed limits for contributions are:

Single Filers

Married, Joint Filers

Married, Separate Filers

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 increases the MCA as shown in the following chart.

The MCA is the aggregate amount that you can contribute to any Roth and/or traditional IRA in a given year. For example, if you are younger than age 50 and you contribute $500 to a traditional IRA for 2007, you can only contribute $3,500 to a Roth IRA.

To make up for lost retirement savings, EGTRRA also added "catch-up" contribution ability for any individual who reaches age 50 or older by the end of his/her taxable year. The chart below shows these additional amounts which will increase the MCA for Roth and traditional IRA owners age 50 or older.

Do I Pay Taxes on My Earnings?

No, provided you take the earnings as part of a qualified distribution. That's the best part of the Roth IRA. Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Roth IRA. However, when you are ready to make a withdrawal, you pay no taxes on any of the earnings that your contributions have generated.

What Is a Qualified Distribution?

In order for earnings to be tax free, you must first meet a five-year holding period for your Roth IRA. This period begins with the tax year for which your first contribution is made. After that, any earnings you withdraw for a qualified distribution reason are income tax free and penalty tax free. Qualified distributions are:

• Distributions made on or after the date on which you attain age 59 1/2,
• Distributions made to your beneficiary (or your estate) upon your death,
• Distributions attributable to your being disabled, and
• Qualified first-time home buyer distributions (up to $10,000).

Does the 10 Percent Premature-Distribution Penalty Tax Apply if I Withdraw My Money Before Age 59 1/2?

The 10 percent premature-distribution penalty tax does not apply to earnings you withdraw when you take any of the qualified distributions listed above. The 10 percent premature-distribution penalty tax is also waived for certain other distribution reasons. But, income taxes on any earnings will apply. Distributions that are subject to taxes on any earnings withdrawn, but no penalty, include:

• Substantially equal periodic payments,
• Eligible medical expenses in excess of 7.5 percent of your adjusted gross income (AGI),
• Health insurance premiums for eligible unemployed individuals,
• Qualified higher education expenses,
• Distributions taken within the first five years for any of these reasons: age 59 1/2, death, disability, or first-time home purchase, and
• Distributions paid directly to the IRS due to IRS levy.

Distributions taken for any reason other than a qualified reason, or one of the reasons listed above, are subject to both taxes and a 10 percent premature-distribution penalty tax on any earnings withdrawn.

What if I Need Access to My Money Now?

A helpful feature of the Roth IRA is that, for distributions, original contribution amounts are returned first. Contributions are not subject to taxation or the 10 percent premature-distribution penalty tax when distributed. In other words, you can always withdraw your principal income tax free and penalty tax free for any reason.

When Do I Have to Start Taking Distributions From My Roth IRA?

You never have to take distributions from your Roth IRA. That's another advantage of the Roth IRA over the traditional IRA. Assets held in a Roth IRA are not subject to age 70 1/2 required minimum distributions.

What Happens in the Event of My Death?

Your named beneficiary(ies) will receive the rights to the balance in your Roth IRA. Distributions to the beneficiarfy(ies) will be made in accordance with the required minimum distribution rules and your IRA agreement.

Can I Move Funds From a Traditional IRA to a Roth IRA?

The law allows a single or joint income tax filer with a MAGI of $100,000, or less, to convert his/her traditional IRA into a Roth IRA. For married taxpayers filing joint returns, the $100,000 limit for conversion eligibility applies to the couple's joint MAGI. A married individual who files a separate return is not eligible to convert. Specific rules may apply in this case; please seek professional tax or legal guidance.

For a conversion to a Roth IRA, the amount converted will be subject to income taxes. However, the funds will not be subject to a 10 percent premature-distribution penalty tax.

What Is the Contribution Deadline for Funding a Roth IRA?

For a given taxable year, you can open and fund a Roth IRA any time between January 1 and the date your tax return is due for the year, excluding extensions. For most taxpayers, this is April 15 of the following year.

How Do I Open a Roth IRA?

See any of our IRA representatives. We will explain the nature of these accounts in more detail, and help you complete the forms necessary to establish your Roth IRA.

This Web page is effective for tax-year 2007 and thereafter. This page is intended to provide general information concerning federal tax laws governing Roth IRAs. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. IRS Publication 590, Individual Retirement Arrangements, and the IRS's web site, www.irs.gov, may also provide helpful information.

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