the roth ira

© 2

003

by

SM

MS

, In

c. M

ar2

003

1

The Roth IRA

What is it and how does it work

Roth IRA vs. Traditional IRA

Contributing to a Roth IRA

Conversion from Traditional IRA

Types of distributions

Is the Roth IRA right for you?

© 2

003

by

SM

MS

, In

c. M

ar2

003

2

This material is intended to provide general information and is not intended to provide legal or tax advice. Because individual situations vary, each situation should be examined carefully to determine appropriate planning strategies. It is recommended that decisions be made after consultation with competent financial, tax and legal professionals.

© 2

003

by

SM

MS

, In

c. M

ar2

003

3

The Roth IRA

The Roth IRA is a retirement savings vehicle similar to the Traditional IRA. With a Traditional IRA you may get tax benefits when you put the money in. With a Roth IRA you may be able to take money out completely income-tax-free.

4

© 2

003

by

SM

MS

, In

c. M

ar2

003

4

The Roth IRA

What the Roth IRA is and how it works

In the simplest terms, with a Roth IRA you put away currently-taxed income to be withdrawn income-tax-free during retirement.1

51 Assumes funds meet Roth IRA minimum holding requirements, if applicable. Retirement funds withdrawn from a Roth

IRA before age 591/2 may be subject to income and/or penalty taxes, depending on the purpose of the withdrawal.

© 2

003

by

SM

MS

, In

c. M

ar2

003

5

No

$3,000

Yes

Yes

5-year holding period may apply to withdrawals

Tax-deductible contribution

Maximum contribution2

Income-tax-deferred growth

Income-tax-free withdrawals

Minimum holding period

The Roth IRADifferences between the Roth IRA and the Traditional IRA

Maybe1

$3,000

Yes

No3

None

Traditional IRARoth IRA

1 Deductibility of Traditional IRA contributions are based on adjusted gross income and participation in an employer-sponsored retirement plan.

2 For 2003-2004 contributions cannot exceed the lesser of $3,000 or your taxable compensation. Spousal contributions are based on total household income, allowing couples to make a maximum contribution of up to $6,000. If you are 50 years of age or older, the limit is $3,500.

3 Withdrawals of non-deductible contribution amounts are tax-free.

© 2

003

by

SM

MS

, In

c. M

ar2

003

6

The Roth IRA

7

Roth IRATraditional IRARoth IRA

Maximum contribution age

Required minimum distributions begin

Tax penalty for earlywithdrawals

Withdrawals for retirement

None

No required distributions for the

original owner

Varies depending on the type and purpose

of the withdrawals

Withdrawals are income-tax-free if the

account is held for more than five years

701/2

701/2

Varies depending on the type and purpose

of the withdrawals

Withdrawals are taxed at present rate1

1 Withdrawals of non-deductible contribution amounts are income-tax-free.

© 2

003

by

SM

MS

, In

c. M

ar2

003

7

Roth IRA

The Roth IRA

7

Traditional IRA

Withdrawals for first-time homebuyers ($10,000 lifetime maximum) before age 591/2

Withdrawals for higher education before age 591/2

Yes – income tax owed on amounts

exceeding contributions if

withdrawn within the first five years

Yes – income taxes owed on amounts

exceeding contributions if

withdrawn within the first five years

Yes – withdrawals taxed at present rate

Yes – withdrawals taxed at present rate

7

© 2

003

by

SM

MS

, In

c. M

ar2

003

8

The Roth IRA


Compare the difference between making a $3,000 contribution to a Roth IRA for 20 years and making a $3,000 contribution to a nondeductible Traditional IRA for 20 years.

8

© 2

003

by

SM

MS

, In

c. M

ar2

003

9

Roth IRA vs. Traditional IRA1 Traditional IRA

6

$23,833

Roth IRA

$60,000

0

$148,269 $124,436

The Roth IRA

$60,000Amount contributed

Value in 20 years $148,269 $148,269

Taxes owed on lump-sum withdrawal

Total amount available to withdraw

1 This hypothetical example is not indicative of any particular investment and does not consider the tax deductibility of the Traditional IRA, which may be important for some investors. The example assumes all contributions are after-tax dollars. Investment return is assumed to be 8 percent, and the assumed federal income tax bracket is 27 percent.

© 2

003

by

SM

MS

, In

c. M

ar2

003

10

The Roth IRA


If the funds are withdrawn over a period of 20 years, how much would you be able to spend at the end of each year?1

8

$15,102Roth IRA:

Traditional IRA: $11,024

1 Withdrawals may be subject to income and/or penalty taxes. This hypothetical example is not indicative of any particular investment. Investment return is assumed to be 8 percent, and the assumed federal income-tax bracket is 27 percent both before and during retirement.

© 2

003

by

SM

MS

, In

c. M

ar2

003

11

Putting money into the Roth IRA

You have two options for putting money into a Roth IRA:

Contribute new money to a Roth IRA each year.

Convert an existing Traditional IRA to a Roth IRA.

10

© 2

003

by

SM

MS

, In

c. M

ar2

003

12


Contributing new money to a Roth IRA

You can open a Roth IRA as long as you have earned income and your adjusted gross income is below a specified limit.

11

© 2

003

by

SM

MS

, In

c. M

ar2

003

13


11

Full contribution

Contribution of less than $3,000

No contribution allowed

Income under $95,000

Income between $95,000-$110,000

Income over $110,000

Income under $150,000

Income between $150,000-$160,000

Income over $160,000

Income of zero (0)

Income between 0-$10,000

Income over $10,000

Single Married filing a joint return

Married filing separately

© 2

003

by

SM

MS

, In

c. M

ar2

003

14

Converting a Traditional IRA to a Roth IRA

If you convert a Traditional IRA to a Roth IRA, you trade current income taxes for the potential of income-tax-free withdrawals in retirement.

You can’t convert a retirement plan distribution directly into a Roth IRA.

13

© 2

003

by

SM

MS

, In

c. M

ar2

003

15


You must meet the following qualifications in order to convert funds:

Your modified adjusted gross income (AGI) must be under $100,000, whether you are single or married filing a joint return. If you are married and file separate returns, you do not qualify for a conversion. The converted amount is not included in determining your AGI for this purpose.

© 2

003

by

SM

MS

, In

c. M

ar2

003

16


You must meet the following qualifications in order to convert funds:

You must pay the income tax on the conversion in the year of the conversion.

© 2

003

by

SM

MS

, In

c. M

ar2

003

17

IRA balance $100,000

Tax owed1 $27,000

Total remaining $73,000

10 percent early withdrawal penalty

Total converted

IRA balance $100,000

Tax paid out of other funds

Total remaining $100,000

No early withdrawal penalty

Total converted

Taxes paid out of IRA Funds Taxes paid out of other funds


Paying taxes on a conversion

14

$2,700

$70,300 $100,000

1 Assumes a 27 percent federal income tax bracket.

© 2

003

by

SM

MS

, In

c. M

ar2

003

18


Partial conversions

Consider a partial conversion if:

A full conversion would push you into a higher income tax bracket.

You don’t have enough cash available to pay the tax on a full conversion.

16

© 2

003

by

SM

MS

, In

c. M

ar2

003

1917


Five-year holding period

Withdrawals of earnings on the account and withdrawal of any funds converted from a Traditional IRA may be subject to penalty and income taxes; if a withdrawal is made within the first five years of the first contribution or conversion to the Roth IRA.

© 2

003

by

SM

MS

, In

c. M

ar2

003

2017


Five-year holding period

If you have multiple Roth IRAs, the clock begins with the first Roth IRA you open. When the first Roth IRA meets the five-year holding requirement, all your Roth IRA accounts meet the requirement.

© 2

003

by

SM

MS

, In

c. M

ar2

003

21


Required minimum distributions

You are not required to take minimum distributions from a Roth IRA.

17

© 2

003

by

SM

MS

, In

c. M

ar2

003

22


The Roth IRA is a retirement savings account, but you might find that you need the money in your account for other purposes. Just remember that if you withdraw funds from your Roth IRA for purposes other than retirement, you will have less savings for retirement.

18

© 2

003

by

SM

MS

, In

c. M

ar2

003

23


Three types of distributions can be made from your Roth IRA:

Qualified distributions. Taxable distributions with no penalty. Taxable distributions with a penalty.

18

© 2

003

by

SM

MS

, In

c. M

ar2

003

24


Qualified distributions

After satisfying the five-year holding period, the following distributions can be made with no federal income tax or penalty owed.

Payments to you after age 591/2. Payments to a beneficiary after your

death.

18

© 2

003

by

SM

MS

, In

c. M

ar2

003

25


Qualified distributions

Distributions due to your disability. First-time home purchase, up to the

lifetime limit of $10,000 for you, your spouse, your children, your grandchildren, and your parents or other ancestors.

18

© 2

003

by

SM

MS

, In

c. M

ar2

003

26


Distributions with no penalty

After satisfying the five-year holding period, the following withdrawals can be made with no penalty owed, prior to age 591/2. Federal income tax is owed on any amount that exceeds the amount of annual contributions.

19

© 2

003

by

SM

MS

, In

c. M

ar2

003

27


Distributions with no penalty

Contributions, excluding earnings, can be withdrawn tax-free at any time.

Higher education expenses for you, your spouse, your children, or your grandchildren.

Certain medical expenses. A series of substantially equal payments over

your life (or life expectancy).

19

© 2

003

by

SM

MS

, In

c. M

ar2

003

28


Distributions with penalty

Any other distributions can be made at any time and are subject to federal income tax and penalties on the amounts exceeding the amount of contributions made directly to the Roth IRA.

19

© 2

003

by

SM

MS

, In

c. M

ar2

003

2919


Taking out funds from a Roth IRA

If you have multiple Roth IRAs, no matter which account you take money out of, the money will be distributed in a set order:

1. Annual contributions (non-conversion).2. Previously taxed portion of your first conversion

Roth IRA.3. Not previously taxed portion of your first

conversion Roth IRA.

© 2

003

by

SM

MS

, In

c. M

ar2

003

30


4. The rest of your conversion IRAs, in order, with the previously taxed portion distributed first.

5. Any earnings on your accounts.

© 2

003

by

SM

MS

, In

c. M

ar2

003

31

Roth IRA case study 2: Bob and Brenda

$30,000deductible

Remaining Traditional IRA balance

$60,000

$30,000 nondeductible

$20,000deductible

Roth IRA $40,000

$20,000 nondeductible

$50,000nondeductible

$50,000deductible

Traditional IRA$100,000

© 2

003

by

SM

MS

, In

c. M

ar2

003

32

The Roth IRA

These IRA choices raise a few questions:

Does it make sense for me to continue contributing to a Traditional IRA?

Should I put my money into a Roth IRA instead?

Should I leave my money in a Traditional IRA?

4

© 2

003

by

SM

MS

, In

c. M

ar2

003

33

Questions?

1. Enrollment Process: 10 Minutes

2. Payroll Deducted: Up to $3000max/yr

3. 50 yrs or Older: Additional $500/yr

the roth ira

Documents