5 Year Rule for Roth IRA Qualified Distributions and Withdrawals

Roth IRA Distributions Rules For Withdrawals: 5 year rule

Roth IRA Five Year Rule- Can You Dig It?

You might be asking yourself what the Jackson Five has to do with the Roth IRA five year rule for qualified withdrawals? I’m sad to say, “Absolutely nothing”. Other than then number “five”, of course. I just thought it was fitting with all the recent tributes to the King of Pop to have my own. Now that I have your attention…..

The basics of the Roth IRA include the phrase “Tax Free Money”.   That phrase makes the Roth IRA the most attractive retirement planning tool of our time.  When it comes to the intricacies of the Roth IRA, in regards to how it works, some confusion can set in.   One provision of the Roth IRA that can leave many scratching their heads is the Roth IRA Distributions Rules For Withdrawals: 5 year rule.

The Five Year Rule pertains to when you can take qualified distributions from your Roth IRA tax and penalty free.  Nobody wants to pay tax and penalties, right?  That’s why it’s important to know how the Roth IRA withdraw rule works.   Just to add more fun to the mix, you need to first know that there are two  sets of Five Year rules.  One pertains to Roth IRA contributions and the other pertains to Roth IRA conversions.  We’ll begin with Roth IRA contributions.

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Keeping Up With Your IRA- Tax Season Checklist

If you’re one of the millions of American households who owns either a Traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2009, for the 2008 tax year.

In either case, this checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy. [Read more…]

Should You Only Have a 401k?

401kAs you’ve read in other posts, I’ve talked about the importance of a 401(k) as well as a Roth IRA. Many clients have asked which one do I do over the other. A basic rule of thumb is if you do have a 401(k) that does have a match, take that first. The reason being is that that is free money and there’s no reason to pass up free money. Most 401(k)’s only match up to a certain percentage, so at least contribute as much as they match.

After the free money, Go for the tax-free money

If you have satisfied that and you still have more money to save, then let’s shift gears and let’s take a look at the Roth IRA. With the Roth IRA, you are allowed to put in up to $5,000 a year, $6,000 if you’re over the age of 50. Our goal then is to max out the Roth IRA after taking full advantage of the free match in the 401k retirement plan. Once the Roth is completely maxed out, then we come back to the 401(k) before we max that out, which is $15,500 per year up to $20,500 after over the age of 50. [Read more…]

2010 Roth IRA Conversion


Are you ready for the Roth IRA conversion?

A very exciting thing is getting ready to occur! Are you ready? You know how excited I am about the Roth IRA.  Well, something exciting is getting ready to occur within the Roth IRA realm that many do not know about. What is it?  It’s the 2010 Roth IRA conversion event.

If this article was helpful, you may also want to check out these posts as well: Roth IRA- Time To Convert ,7 Things You Need to Know About the Roth IRA Conversion for 2010, Roth IRA Conversion Tax Rules.

The 2010 Roth IRA Conversion Is Coming

Currently, if you have money in a traditional IRA and you want to convert it to a Roth IRA, you are unable to do so if your Adjusted Gross Income is greater than $100,000 a year. This is especially frustrating if your income is greater than the Roth IRA Phaseout Limits that leaves you without being able to take advantage of one of the greatest retirement planning tools. Don’t be depressed yet. There is still hope. Drum roll please……Introducing the 2010 Roth IRA Conversion Event. What happens in 2010 is that these income limits will become extinct, so that anyone, no matter your income limit, can convert from traditional IRAs to Roth IRAs.

Tax Ramifications

The one thing to be knowledgeable about is that we will have an income tax consequence due to this action, but the IRS has implemented a favorable tax treatment upon doing this. The favorable tax treatment works like this:

  • Usually if you convert from a traditional to a Roth, you are then burdened with the tax owed that current year, based off your ordinary income tax rate.
  • But the IRS has graciously allowed you to defer your tax owed in 2010, to where you only have to pay half of the tax burden on your 2011 return, and the remaining half on your 2012 tax return.
  • It’s a  nice little incentive if you are considering converting your traditional IRA  or old 401k’s to a Roth IRA because of this favorable tax treatment.

This strategy is not right for everyone. As usual, you want to talk to your tax professional or financial planner before implementing this strategy.

Reader Question #1

question_mark_3dAfter funding their retirement needs, many wish to pass on any remaining to their heirs. But for some, we wish that we could have some control when they could get the money. One such reader, wanted to know how he could benefit his grandson with the tax free benefit of the Roth IRA.

Grandfather With a Good Heart

The reader was roughly 60 years of age and wanted to open a Roth IRA for his grandson. He wanted to make a $1,000 contribution in the Roth IRA thinking that the grandson would not be able to touch the money until he was age 60, and then could benefit from the tax-free growth that the Roth IRA provides. Just to give you an idea, if $1000 were to earn on average 8% in an stock investment inside the Roth, it would grow to be around $101,000. So the grandson would then have roughly $100,000 of tax-free money waiting for him at retirement. At least that’s what the grandfather was hoping. While I do appreciate the tactic that the grandfather was trying to implement, we do occur a bit of a problem. Since the grandson is a minor and; more importantly, does not have any earned income (I believe the grandson was around 5 years of age) he would not be able to take out the Roth.

Different Strategy

Well, after the initial attempt to pass on to grandson didn’t work out, he inquired about a different approach. Could we then open a Roth IRA for the grandfather and then make the grandson the sole beneficiary? Thinking again that the grandson could not, touch the money until age 60. But unfortunately, in that case, when the grandfather passes away, and if the grandson is the beneficiary, the grandson would inherit the account and then would have access to the money immediately and would not have to wait until age 60. Unfortunately, that idea did not work either.

One Solution

So, based on that situation, the only really possible way for the grandfather to achive his goal would be to set up a trust that would prohibit the grandson from having access to the money to a certain age. In my opinion, waiting till age 60 is probably a bit to the extreme. Having set it up in the trust account, it would not be in a Roth IRA, so therefore there would be no tax-free benefit, which I believe what the grandfather was trying to accomplish

Another possibility

If the grandfather would wait until the grandson was 18, or any age, for that matter, that he actually had the earned income, he could then open up a Roth IRA in the child’s name (a minor can have an IRA as long as they have earned income and there is a custodian on the account). The only downside is that the child would have access to the funds and could withdraw them at any time possibly subject to tax and penalty. But if the child was educated on the tax free benefit waiting for him at retirement, then the grandfather’s wishes may be achieved.

Roth IRA Phaseout

phaseout_iraAs I stated before, Roth IRA’s are the greatest thing since sliced bread. Their only disadvantage is if you make too much money.  What? The government disciplining you for making too much money?  That’s absurd, right?  Sorry, not the case. The Roth IRA has what is called Phase Out limits.  We are not talking about that phase were tie dyed shirts  were in and now they are out (hence the groovy pic).  Phase out applies to whether you are allowed to contribute to a Roth IRA in full, partial, or not at all. [Read more…]

Introducing The Roth IRA

sliced_bread_roth_iraI will go on record as to say that the Roth IRA is the greatest thing since sliced bread. Here’s is some insight to my reasoning:

Roth IRA = Tax Free Money

Do you enjoy paying taxes? Do enjoy getting your pay stub each pay period and seeing how much you give to the IRS? Don’t you wish there was a way for you to beat the system and get tax free money? Well, it case you missed it-there is. It’s called the Roth IRA. Maybe you have heard about it. If you have, and you haven’t opened one yet then stop reading this and go do it. Then come back and learn how it works. [Read more…]