2. Roth IRAs
What's New for 2007
Modified AGI limits for Roth IRA contributions increased. For 2007, 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 $156,000. You cannot make a Roth IRA contribution if your modified AGI is $166,000 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 2007 and your modified AGI is at least $99,000. You cannot make a Roth IRA contribution if your modified AGI is $114,000 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.
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 in an earlier year, you may be able to contribute up to $7,000 to your Roth IRA. See Catch-up contributions in certain employer bankruptcies under How Much Can Be Contributed? in this chapter.
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 will generally be 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 will generally be 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. For 2008, you can rollover amounts from an eligible retirement plan into a Roth IRA. For more information, see Rollovers from other retirement plans 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:
- $166,000 for married filing jointly or qualifying widow(er),
- $114,000 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.
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. 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.
- Subtract the following:
- Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA. Conversions are discussed under Can You Move Amounts Into a Roth IRA, later.
- Minimum required distributions from IRAs, (for conversions only).
- Add the following deductions and exclusions:
- Traditional IRA deduction,
- Student loan interest deduction,
- Tuition and fees deduction,
- Domestic production activities deduction,
- Foreign earned income exclusion,
- Foreign housing exclusion or deduction,
- Exclusion of qualified bond interest shown on Form 8815, and
- Exclusion of employer-provided adoption benefits shown on Form 8839.
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 $156,000 | you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained under How Much Can Be Contributed. |
| at least $156,000 but less than $166,000 | the amount you can contribute is reduced as explained under Contribution limit reduced. | |
| $166,000 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 $4,000 ($5,000 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 $99,000 | you can contribute up to $4,000 ($5,000 if you are age 50 or older) as explained under How Much Can Be Contributed. |
| at least $99,000 but less than $114,000 | the amount you can contribute is reduced as explained under Contribution limit reduced. | |
| $114,000 or more | you cannot contribute to a Roth IRA. |
Note. You may be able to contribute up to $7,000 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 2008, the amounts in Table 2-1 increase. 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 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 $101,000. You cannot make a Roth IRA contribution if your modified AGI is $116,000 or more.
Roth IRAs only
If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:
- $4,000 ($5,000 if you are age 50 or older), or
- Your taxable compensation.
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:
- $4,000 ($5,000 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.
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.
Repayment of reservist and hurricane distributions
You can repay qualified reservist and qualified hurricane 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 distributions to a Roth IRA, the repayment is first considered to be a repayment of earnings. Any repayments of qualified hurricane 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 Repayment of qualified hurricane distribution to a Roth IRA under Repayment of Qualified Hurricane Distributions in chapter 4.
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.
Figuring the reduction
If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.
- Start with your modified AGI.
- Subtract from the amount in (1):
- $156,000 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 during the year, or
- $99,000 for all other individuals.
- 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).
- Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
- Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.
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 or a minimum required distribution from an IRA (if figuring MAGI for conversion purposes) | 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:
| 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. | |||||||
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:
| 2. | |
| 3. | Subtract line 2 from line 1 | 3. | |
| 4. | Enter:
| 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:
| 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. |
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 2007. Your modified AGI for 2007 is $100,000. You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $4,000. Using the steps described earlier, you figure your reduced Roth IRA contribution of $3,740 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. | 100,000 |
| 2. | Enter:
| 2. | 99,000 |
| 3. | Subtract line 2 from line 1 | 3. | 1,000 |
| 4. | Enter:
| 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:
| 6. | 4,000 |
| 7. | Multiply line 5 by line 6 | 7. | 268 |
| 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. | 3,740 |
| 9. | Enter contributions for the year to other IRAs | 9. | 0 |
| 10. | Subtract line 9 from line 6 | 10. | 4,000 |
| 11. | Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit | 11. | 3,740 |
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 2007 by the due date (not including extensions) for filing your 2007 tax return. This means that most people can make contributions for 2007 by April 15, 2008.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:
- 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 (explained earlier under How Much Can be Contributed?), 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 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 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.
Rollovers from other retirement plans
Prior to 2008, you can only rollover (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. After 2007, you can rollover amounts from the following plans into a Roth IRA.
- A qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),
- An annuity plan,
- A tax-sheltered annuity plan (section 403(b) plan),
- A deferred compensation plan of a state or local government (section 457 plan), or
- An IRA.
Failed Conversions
If, when you converted amounts from a traditional IRA or SIMPLE IRA 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.
Results of failed conversions
If the converted 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 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.
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.
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.
- 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
- The payment or distribution is:
- Made on or after the date you reach age 59½,
- Made because you are disabled,
- Made to a beneficiary or to your estate after your death, or
- One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
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 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 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 (the conversion contribution) that you had to include in income. A separate 5-year period applies to each conversion. See Ordering Rules for Distributions, later, to determine the amount, if any, of the distribution that is attributable to the part of the conversion 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 contribution is separately determined for each conversion, 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, 2002, and makes a regular contribution for 2001 on the same date, the 5-year period for the conversion begins January 1, 2002, while the 5-year period for the regular contribution begins on January 1, 2001. 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 contribution that you had to include in income because of the conversion. You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion 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.
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. 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.
- Regular contributions.
- Conversion contributions, on a first-in-first-out basis (generally, total conversions from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion contributions into account as follows:
- Taxable portion (the amount required to be included in gross income because of conversion) first, and then the
- Nontaxable portion.
- 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 contributions made during the year together. For purposes of the ordering rules, in the case of any conversion in which the conversion distribution is made in 2007 and the conversion contribution is made in 2008, treat the conversion contribution as contributed before any other conversion contributions made in 2008.
Example —
On October 15, 2002, 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, 2007, Justin makes a regular contribution of $4,000 to a Roth IRA. On November 7, 2007, at age 60, Justin takes a $7,000 distribution from his Roth IRA.
The first $4,000 of the distribution is a return of Justin's regular contribution and is not includible in his income.
The next $3,000 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 | 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) 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 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.
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 to a Roth IRA,
Example —
When Ms. Hibbard died in 2007, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2003, and earnings of $2,000. No distributions had been made from her IRA. She had no basis in the conversion contribution in 2003.
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 2007. 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.
