WHO CAN CONTRIBUTE TO A ROTH IRA?

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1 { } ROTH IRAs 1

2 WHO CAN CONTRIBUTE TO A ROTH IRA? Any taxpayer who has compensation, regardless of age, can contribute to a ROTH IRA. Compensation is defined as wages, salaries, bonuses, commissions, tips, professional fees, self employment income and alimony. It does not include interest, dividends, pension income, deferred compensation payments or property rental income. A nonworking spouse that does not have compensation may also have a contribution made on their behalf by their spouse who does have compensation. WHAT IS THE MAXIMUM CONTRIBUTION? The maximum contribution is the lesser of $5,500 (for 2013 s contributions) or 100% of compensation. If an individual is age 50 or older, they are permitted to make an additional catch-up contribution up to $1,000. A married couple, filing jointly can make a contribution for each person up to these maximums. 2

3 WHEN ARE ROTH IRA CONTRIBUTIONS PERMITTED? Contributions are permitted if your modified adjusted gross income (MAGI) is below certain thresholds as shown in table 1 below. MAGI is Adjusted Gross Income plus your IRA contribution, student loan interest deductions, foreign earned income exclusion or housing exclusion or deduction, qualified savings bond interest, qualified tuition expense deductions, and any excluded employer paid adoption expenses from form MAGI PHASE OUT TABLE CONTRIBUTION LEVEL SINGLE/HEAD OF HH Full contribution less than $112,000 Partial contribution $112,000 - $127,000 No contribution more than $127,000 CONTRIBUTION LEVEL MARRIED/WIDOW(ER) Full contribution less than $178,000 Partial contribution $178,000 - $188,000 No contribution more than $188,000 CONTRIBUTION LEVEL MARRIED FILING SEPARATELY Full contribution N/A Partial contribution $0 - $10,000 No contribution more than $10,000 Table 1. WHEN MUST CONTRIBUTIONS BE DEPOSITED? ROTH IRA contributions must be deposited no later than April 15th after the end of the tax year. 3

4 WHO CAN USE THE SAVER S TAX CREDIT? The new tax credit applies to all taxpayers below the income levels in the chart below. Although ROTH contributions are non-deductible, the tax credit is on the first $2,000 contributed. TAX CREDIT SINGLE 50% < $17,750 20% 17,751 19,250 10% 19,251 29,500 0 % > $29,500 TAX CREDIT HEAD OF HOUSEHOLD 50% < $26,625 20% 26,626 28,875 10% 28,876 44,250 0 % > $44,250 TAX CREDIT MARRIED FILING JOINTLY 50% < $35,500 20% 35,501 38,500 10% 38,501 59,000 0 % > $59,000 EXAMPLE: John is single and earned $14,000 for the year. John can fund his ROTH IRA with $2,000 and receive a tax credit of $1,000! The Saver s Tax Credit applies to all taxpayers whose income falls within the prescribed levels. 4

5 WHERE CAN YOU INVEST YOUR ROTH IRA? ROTH IRA contributions must be in cash and may be invested in certificates of deposit or other liquid accounts at banks and credit unions. Additionally, contributions to a ROTH IRA can be invested in mutual funds, annuities, individual stocks and bonds. WHAT IS A ROTH CONVERSION? You can convert any amount from a Traditional, SEP or SIMPLE IRA to a ROTH IRA if you are not married filing separately. You do have to pay income taxes when doing a conversion, however, the 10% excise tax is waived. You may not convert amounts you receive due to taking required minimum distributions from a Traditional IRA. WHAT IS RECHARACTERIZATION? You can unconvert a ROTH conversion back into a Traditional IRA via a trustee-to-trustee transfer and undo the taxable event. This recharacterization can be done up until the due date of your tax return for the year in which the conversion took place, including extensions. Once you recharacterize a ROTH IRA, you must wait until the later of the next tax year, or 30 days, to convert the account to a ROTH again. 5

6 WHY SHOULD YOU CONSIDER A ROTH IRA? 1. Tax Credits. You may be eligible for the Saver s Tax Credit on your ROTH IRA even though contributions are not deductible. Tax credits are a dollar for dollar reduction in your taxes. 2. Tax Deferral. Your IRA investment earnings grow tax-deferred. 3. Increasing Contributions. Contribution limits for Traditional and Roth IRAs change every year. Ask your representative what the current limit is. There is also a higher catch-up limit for individuals over 50 years of age. Contributions will be adjusted for cost of living adjustments (COLAs) in $500 increments. All in all, these limits make either type of IRA an attractive retirement savings vehicle. 4. You re in Control. You are always in control of when you make your contribution and where you will invest. 5. Tax-Free Income. The distribution rules for ROTH IRAs are very different from Traditional IRAs. When taking a distribution, you must withdraw all of your contributions first. Of course, your ROTH IRA contributions have already been taxed, so there are no taxes when they are withdrawn. 6

7 If your withdrawal is a qualified distribution, you do not pay income taxes when earnings are withdrawn either. A qualified distribution is a withdrawal after five tax years beginning with the first tax year for which a contribution was made, and you meet one of the following criteria: 1. you have attained age 59 ½; or 2. you are disabled; or 3. the distribution is to your beneficiary after your death; or 4. you are a first time home buyer. A first time home buyer is someone who has not owned a home for the previous two years. There is a lifetime maximum of $10,000 for withdrawals to a first time home buyer. If you do not meet both of the above requirements, then the withdrawal is not a qualified distribution, and will be subject to income taxation, and the 10% excise tax if you are under age 59 ½. 7

8 IT PAYS TO SEE THE DIFFERENCE. Cost of Waiting COST OF WAITING $250,000 $200,000 $150,000 $100,000 $50,000 $ Year Senario A Senario B Senario C Scenario A Contribution for all 20 years Ending Value: $219,326 Scenario B Contributions made for years 1 through 7 only Ending Value: $111,573 Scenario C Contributions made for years 8 through 20 only Ending Value: $107,752 This is a hypothetical illustration of the growth over a 20 year period of a $5,000 IRA contribution with a 7% rate of return using different contribution time periods. It is not intended to reflect the actual performance of any security. Investments involve risk and you may incur a profit or loss. Mike Butts Program Manager Clairmont Road Decatur, GA This information is general in nature and should not be construed as tax advice. INVEST Financial Corporation does not provide tax advice. Please consult your tax adviser for guidance on your particular situation. Registered Representative of INVEST Financial Corporation (INVEST), member FINRA/SIPC. INVEST is not affiliated with Emory Alliance Credit Union or Alliance Retirement & Investment Services. INVEST and its affiliated insurance agencies offer securities, advisory services and certain insurance products. Products offered are: Not NCUA insured Not Credit Union Guaranteed May lose value including loss of principal. p.bro