The Roth IRA

• What is a Roth IRA?
• Roth IRA Contribution Limits
• Roth IRA Catch-up contributions
• Roth IRA Eligibility
• Roth IRA Rules

What Is a Roth IRA?

Created in 1997 by Senator Roth of Delaware, the Roth IRA is a tax-free savings plan. Contributions are made with after-tax dollars and are NOT tax deductible. All funds within the Roth IRA compound tax-free and all withdrawals from the account are also tax free (as long as the account owner is 59½ and the account has been opened for five years).

One of the main benefits of a Roth IRA is that there's no required mandatory distribution (RMD) at age 70½. Individuals can continue to contribute as long as they like, and all withdrawals continue to be tax free (if the account has been open for at least five years).

Anyone who has earned income and falls within the MAGI (Modified Adjusted Gross Income) limits can establish a Roth IRA.

Roth IRA Contribution Limits

The contribution limit for a Roth IRA is $5,000 in 2009 and 2010 ($6,000 if you're age 50 or older). See a full list of contribution limits for all Equity Trust IRAs and retirement plans.

Roth IRA Catch-up Contributions

If you turn age 50 or older in 2009 or 2010, you can contribute up to $6,000. See a full list of contribution limits for all Equity Trust IRAs and retirement plans.

Roth IRA Eligibility

Generally, you can contribute to a Roth IRA if you have taxable compensation* and your modified adjusted gross income (AGI) is less than:

• $176,000 if you're married filing jointly or qualifying widow(er) in 209; less than $177,000 in 2010
• $10,000 if you're married filing separately and you lived with your spouse at any time during the year
• $120,000 if you're single in 2009, head of the household, or married filing separately and you did not live with your spouse at any time during the year. Less than $120,000 if you're single in 2010 head of the household, or married filing separately and you did not live with your spouse at any time during the year.

You can contribute to your Roth IRA regardless of your age. You can also contribute to a Roth IRA for your spouse.

*Compensation is defined as the wages, salaries, commissions, bonuses, alimony and any other amount that you receive for providing personal services. For individuals who are self-employed, sole proprietors and partners in a partnership, "earned income" is another term for compensation. Passive income such as interest, dividends and most rental income are not considered compensation for the purpose of funding an IRA.

Roth IRA Rules

Guidance regarding the rules and restrictions imposed upon Roth IRAs can be found in IRS Publication 590.

If you don't follow the rules for Roth IRAs, the tax-deferred status of the account could be questioned. This could lead to the disqualification of the IRA and severe tax consequences.

Prohibited transactions and prohibited investments in a Roth IRA are clearly defined by the IRS.

Prohibited Transactions

Generally, a prohibited transaction is any improper use of your Roth IRA or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are examples of prohibited transactions with a Roth IRA:

• Borrowing money from it
• Selling property to it
• Receiving unreasonable compensation for managing it
• Using it as security for a loan
• Buying property for personal use (present or future) with IRA funds

Fiduciary - For IRA purposes, a fiduciary is someone who does any of the following:

• Exercises any discretionary authority or discretionary control in managing your IRA, or exercises any authority or control in managing or disposing of its assets
• Provides investment advice to your IRA for a fee, or has any authority or responsibility to do so
• Has any discretionary authority or discretionary responsibility in administering your IRA.

Effect on an IRA - Generally, if you or your beneficiary engages in a prohibited transaction in connection with your Roth IRA at any time during the year, the account stops being an IRA as of the first day of that year.

Effect on you or your beneficiary - If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as though it distributed all of its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you'll have a taxable gain that's included in your income.

Prohibited Transactions - Investment in Collectibles

If your Roth IRA invests in collectibles, the amount invested is considered to be distributed to you in the year it was invested. You may also have to pay the 10% additional tax on early distributions.

Collectibles include:

• Artworks
• Rugs
• Antiques
• Metals
• Gems
• Stamps
• Coins
• Alcoholic beverages
• Certain other tangible personal property

Exceptions

Your Roth IRA can invest in the following:

• Gold coins of one, one-half, one-quarter, or one-tenth ounce minted by the U.S. Treasury Department
• One-ounce silver coins minted by the U.S. Treasury Department
• Certain platinum coins
• Certain gold, silver, palladium, and platinum bullion.

Qualified Distributions

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.

Basis of distributed property - The basis of property distributed from a Roth IRA is the property's 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 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:

1. It's made after the five-year period beginning with the first taxable year for which you made a contribution was made to a Roth IRA that was set up for your benefit.
2. The payment or distribution is:
   • Made on or after the date you reach age 59½
   • Made because you're disabled
   • Made to a beneficiary or to your estate after your death
   • Made to buy, build or rebuild a first home (up to a maximum amount of $10,000)

Additional Tax on Early Distributions

If you receive a distribution that's not a qualified distribution, you may have to pay the 10% additional tax on early distributions.

Exceptions

• You've reached age 59½.
• You're disabled.
• You're 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're paying medical insurance premiums after losing your job.
• The distributions aren't 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.

Do You Have to Withdraw or Use Assets?

You're 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 minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs (see the next section, Distributions after Owner's Death).

Distributions after Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs. It's as though the Roth IRA owner died before his or her required beginning date.

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.

If paid as an annuity, the entire interest must be paid 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 deceased IRA owner.

If the sole beneficiary is the spouse, he or she can do ONE of the following:

• Delay distributions until the deceased IRA owner would have reached age 70½
• 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 ONE of these conditions is met:

• The beneficiary inherited the other Roth IRA from the same deceased IRA owner
• The beneficiary was the spouse of the deceased IRA owner, was the sole beneficiary of the Roth IRA, and elects to treat it as his or her own IRA