Beginning in 1998, regardless of your age, you may be able to establish and contribute to a new individual retirement plan called a Roth IRA.

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, all earnings and withdrawals 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, SIMPLE IRA, or education IRA.

Table 18-3. AGI limit (Roth IRAs)

Can I Contribute to a Roth IRA?

Generally, you can contribute to a Roth IRA if you have taxable compensation and your modified AGI (defined later) is less than the amount shown for your filing status in Table 18-2.

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 earlier under Traditional IRAs and your modified AGI (defined later) is less than the amount shown for your filing status in Table 18-2.

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. Modified AGI is your adjusted gross income (AGI) as shown on your return modified as follows:

1. Subtract any income resulting from a conversion (rollover) from an IRA (other than a Roth IRA) into a Roth IRA, and
2. Add the following exclusions and deductions:
   1. Traditional IRA deduction,
   2. Student loan interest deduction,
   3. Foreign earned income exclusion,
   4. Foreign housing exclusion or deduction,
   5. Exclusion of qualified bond interest shown on Form 8815, and
   6. Exclusion of employer-paid adoption expenses shown on Form 8839.

How Much Can I Contribute?

The contribution limit for Roth IRAs depends on whether you contribute only to Roth IRAs or to both traditional IRAs and Roth IRAs.

Roth IRAs only. If you contribute only to Roth IRAs, the contribution limit is the lesser of $2,000 or your taxable compensation. If your modified AGI is above a certain amount, you may have to reduce this limit, as explained later in Contribution limit reduced.

Roth IRAs and traditional IRAs. If you contribute to both Roth IRAs and traditional IRAs established for your benefit, the contribution limit for Roth IRAs must be 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. If your modified AGI is above a certain amount, you also may have to reduce this limit as explained next.

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 your modified AGI is within the range shown in Table 18-3 for your filing status, see Publication 590.

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?

If you make an excess contribution to a Roth IRA, a 6% penalty tax applies to the excess.

Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:

1. Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a traditional or Roth IRA, as described later) that are more than your contribution limit for the year, plus
2. Any excess contributions for the preceding year, reduced by the total of:
   1. Any distributions out of your Roth IRAs for the year, plus
   2. Your contribution limit for the year minus your contributions to all your IRAs (other than education IRAs) for the year.

Excess contributions withdrawn on or before the due date. 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.

Can I Move Amounts Into a Roth IRA?

You may be able to move (convert or roll over) amounts from a traditional, SIMPLE, or Roth IRA into a Roth IRA. You may also be able to move (transfer) contributions made to one IRA to a different IRA and recharacterize them as having been made directly to the different IRA.

Conversions (Rollovers)

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 under Rollover From One IRA Into Another, under Traditional IRAs, earlier, apply to these rollovers. However, the one-year waiting period described earlier does not apply.

Conversion methods. There are three ways to convert (move or rollover) amounts from a traditional IRA to a Roth IRA.

1. 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.
2. 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.
3. 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.

Converting from any traditional IRA. You can convert (move or rollover) 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.

1. Your modified AGI (explained earlier) is not more than $100,000.
2. You are not a married individual filing a separate return.

Required distributions. Amounts that must be distributed from a traditional IRA during a particular year, under the required distribution rules (discussed under Traditional IRAs, earlier) are not eligible for conversion (rollover) treatment.

Income. You must include in your gross income amounts that you withdraw from a traditional IRA that you would have to include in income if you had not converted them (rolled them over) into a Roth IRA. You do not include in gross income any part of a withdrawal from a traditional IRA that is a return of your basis, as discussed earlier under Traditional IRAs.

Conversion (rollover) of 1998 withdrawal from a traditional IRA. If you withdrew an amount from a traditional IRA in 1998 and converted it (rolled it over) to a Roth IRA, any amount you must include in income as a result of the withdrawal is generally included ratably over a 4-year period, beginning with 1998. This means you include one-quarter of the amount in 1998, one-quarter in 1999, one-quarter in 2000, and one-quarter in 2001. However, see Later withdrawals from Roth IRA, later.

Election not to use 4-year period. You can elect to include the total amount in 1998 rather than ratably over the 4-year period. You make the election on Form 8606. If you make this election, you cannot change it after the due date (including extensions) for your 1998 tax return.

Later withdrawals from Roth IRA. If you include the taxable part of a 1998 conversion (rollover) ratably over the 4-year period and in 1998, 1999, or 2000 you withdraw from the Roth IRA any amount allocable to the taxable part of the conversion, you will generally have to include in income both the ratable (one-quarter) portion for the year and the part of the withdrawal made during the year that is allocable to the taxable part of the conversion. See Ordering rules for withdrawals, later for information on how to determine the amount allocable to the taxable part of the conversion.

Death of IRA owner during 4-year period. If a Roth IRA owner who is including amounts ratably over the 4-year period dies before including all of the amounts in income, any amounts not included must generally be included in the owner's gross income for the year of death. However, If the owner's surviving spouse receives the entire interest in the Roth IRA, that spouse can elect to continue to ratably include the amounts in income over the remaining years in the 4-year period. The election is made on Form 8606 and must be made by the tax return due date for the surviving spouse's tax year that includes the date of the owner's death. Any amount includible in the decedent's (owner's) gross income for the year of death under this rule must be reported on the decedent's final return.

Converting from a SIMPLE IRA. Generally, you can convert (roll over) 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 (transfer or roll over) 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 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. The rules for rollovers explained under Rollover From One IRA Into Another, under Traditional IRAs, earlier, apply to this rollover.

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.

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. However, if the same trustee maintains both IRAs, you can have the trustee transfer the contribution from the first IRA to the second IRA. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution to the first IRA was made, you can elect to treat the contribution as having been 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.

No deduction is allowed for the contribution to the first IRA and any net earnings transferred with the recharacterized contribution are treated as earned in the second IRA.

Effect of previous tax-free transfers. If an IRA has been moved from one IRA to another in a tax-free transfer, such as a rollover, the contribution to the second IRA generally cannot be recharacterized.

How do I recharacterize a contribution? To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was initially made) and the trustee of the second IRA (the one to which the contribution is transferred) 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.

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 the tax form 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). Distributions that you roll over tax free into another IRA are not included either. You may have to include part of other distributions in your income. See Ordering rules for withdrawals, later.

What are qualified distributions? A qualified distribution is, generally, any payment or distribution from your Roth IRA:

1. Made on or after the date you reach age 59 1/2,
2. Made because you are disabled,
3. Made to a beneficiary or to your estate after your death, or
4. To pay certain qualified first-time homebuyer amounts discussed in Publication 590.

Distributions that are not qualified distributions. A distribution is not a qualified distribution if either of the following rules applies.

1. 5-year rule. Any distribution made within the 5-tax-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit is not a qualified distribution. Even if a distribution is one described earlier under What are qualified distributions?, it must also satisfy the 5-year rule to be a qualified distribution.
2. Excess contributions rule. Withdrawals of excess contributions and the earnings on them before the due date of your return (including extensions) are not qualified distributions. The returned contributions are not taxable, but the distributed earnings are taxable in the year the contribution to which they relate was made and may be subject to the 10% additional tax on premature distributions.

Additional tax--withdrawals of conversion contributions within 5-year period. If within the 5-year period starting with the year of a conversion contribution, any part of a withdrawal from a Roth IRA is from the taxable part of an amount converted, the 10% additional tax on premature distributions applies. It applies only to the portion of a conversion contribution that is includible in income because of the conversion. And it applies as though the amount is includible in gross income in the year of the withdrawal, even if no conversion income is includible.

Additional tax--other withdrawals. The taxable part of other withdrawals from your Roth IRA(s) that are not qualified distributions is subject to the additional tax on premature distributions. See Publication 590 for more information.

Ordering rules for withdrawals. If you make a withdrawal from your Roth IRA that is not a qualified distribution, part of the withdrawal may be taxable. For purposes of determining the correct tax treatment of withdrawals (other than the withdrawal of excess contributions and the earnings on them, discussed earlier), there is a rule that sets the order that you withdraw contributions (including conversion contributions) and earnings from your Roth IRA. Regular contributions are withdrawn 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 an 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.

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