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.

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.

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.

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:

· $169,000 for married filing jointly or qualifying widow(er),

· $116,000 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.

You may be eligible to claim a credit for contributions to your Roth IRA.

Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age.

Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $169,000.

Compensation.   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, 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.

1. Subtracting the following.

a. Roth IRA conversions included on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. Conversions are discussed under Can You Move Amounts Into a Roth IRA, later.

b. Roth IRA rollovers from qualified retirement plans included on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

c. Minimum required distributions from IRAs (for conversions and rollovers from qualified retirement plans only).

2. Add the following deductions and exclusions:

a. Traditional IRA deduction,

b. Student loan interest deduction,

c. Tuition and fees deduction,

d. Domestic production activities deduction,

e. Foreign earned income exclusion,

f. Foreign housing exclusion or deduction,

g. Exclusion of qualified bond interest shown on Form 8815, and

h. Exclusion of employer-provided adoption benefits shown on Form 8839.

  You can use Worksheet 2-1 to figure your modified AGI.

Do not subtract conversion income or minimum required distributions from IRAs when figuring your other AGI-based phase outs and taxable income, such as your deduction for medical and dental expenses. Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes.

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).

Note. You may be able to contribute up to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year.

For 2009, the amounts in Table 2-1 increase. For 2009, 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 $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 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 $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.

Roth IRAs only.   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:

· $5,000 ($6,000 if you are age 50 or older), or

· Your taxable compensation.

  This limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year.

  However, if your modified AGI is above a certain amount, your contribution limit may be 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 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:

· $5,000 ($6,000 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.

  This limit may be increased to $8,000 if you participated in a 401(k) plan maintained by an employer who went into bankruptcy in an earlier year.

  However, if your modified AGI is above a certain amount, your contribution limit may be reduced.

  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.

If you choose to make these catch-up contributions, the higher contribution limits for individuals who are age 50 or older do not apply. The most that can be contributed to your Roth IRA is the smaller of $8,000 or your taxable compensation for the year.

Repayment of reservist, hurricane, disaster recovery assistance, and recovery assistance distributions.   You can repay qualified reservist, qualified hurricane, qualified disaster recovery assistance, and qualified recovery assistance 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.

Conversions

You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used.

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.

Rollover From Employer's Plan Into a Roth IRA

Prior to 2008, you could only roll over (convert) amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. Beginning in 2008, you can roll over into a Roth IRA all or part of an eligible rollover distribution you’re receive from you’re (or your deceased spouse's):

· Employer's qualified pension, profit-sharing or stock bonus plan (including a 401(k) plan),

· Annuity plan,

· Tax-sheltered annuity plan (section 403(b) plan), or

· Governmental deferred compensation plan (section 457 plan).

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.

Income.   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid.

Example.

In July of 2008, you decide to roll over $50,000 from your 401(k) plan to your Roth IRA. You have no after-tax contributions. For 2008, you must include in income $50,000.

If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See Publication 505, Tax Withholding and Estimated Tax.

Rollover methods.   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways.

·         Rollover. You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. Since the distribution is paid directly to you, the payer generally must withhold 20% of it.

·         Direct rollover option. Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA.

How to report.   A rollover to a Roth IRA is not a tax-free distribution other than any after-tax contributions you made. Report a rollover from a qualified retirement plan to a Roth IRA on Form 1040, lines 16a and 16b; Form 1040A, lines 12a and 12b; or Form 1040NR, lines 17a and 17b.

  Enter the total amount of the distribution before income tax or deductions were withheld on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. This amount is shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Enter the remaining amount, even if zero, on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b.

Failed Conversions and Rollovers

If, when you converted amounts from a traditional IRA or SIMPLE IRA into a Roth IRA or when you rolled over amounts from a qualified retirement plan 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 or failed rollover.

Results of failed conversions and failed rollovers.   If the converted or rolled over amount (contribution) is not recharacterized , 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.