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Roth IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account that allows only nondeductible contributions but features tax-free withdrawals for certain distribution reasons after a five-year holding period.

The term "tax-free" means free from federal income taxes.

Am I Eligible for a Roth IRA?
There are two requirements for eligibility to contribute to a Roth IRA: you must have compensation (or your spouse must have compensation) and your modified adjusted gross income (MAGI) cannot exceed specified limits.

How Much Can I Contribute Each Year?
In 2008, the contribution limit (all of which must come from earned income) is $5,000. Additionally, if you are age 50 or older by the end of your taxable year, you are eligible to make a catch-contribution of up to $1,000.

Do I Pay Taxes on My Earnings?
No, provided you take the earnings as part of a qualified distribution. That's the best part of the Roth IRA. Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Roth IRA. However, when you are ready to make a withdrawal, you pay no taxes on any of the earnings that your contributions have generated.

What Is a Qualified Distribution?
In order for earnings to be tax free, you must first meet a five-year holding period for your Roth IRA. This period begins with the tax year for which you first contribution is made. After that, any earnings you withdraw for a qualified distribution reason are income tax free and penalty tax free. Qualified distributions are:

Distributions made on or after the date on which you attain age 59 1/2,
Distributions made to your beneficiary (or your estate) upon your death,
Distributions attributable to your being disabled, and
Qualified first-time home buyer distributions (up to $10,000).

Does The 10 Percent Premature-Distribution Penalty Tax Apply if I Withdraw My Money Before Age 59 1/2?
The 10 percent premature-distribution penalty tax does not apply to earnings you withdraw when you take any of the qualified distsributions listed ablve. The 10 percent premature-distribution penalty tax is also waived for certain other distribution reasons. But, income taxes on any earnings will apply. Distributions that are subject to taxes on any earnings withdrawn, but no penalty, include:

Substantially equal periodic payments,
Qualified Reservist Distributions,
Eligible medical expenses in excess of 7.5 percent of your adjusted gross income (AGI),
Health insurance premiums for eligible unemployed individuals,
Qualified higher education expenses,
Distributions taken within the first five years for any of these reasons: age 59 1/2, death, disability, or first time home purchase, and
Distributions paid directly to the IRS due to IRS levy.

Distributions taken for any reason other than a qualified reason, or one of the reasons listed above, are subject to both taxes and a 10 percent premature-distribution penalty tax on any earnings withdrawn.

What if I Need Access to My Money Now?
A helpful feature of the Roth IRA is that, for distributions, original contribution amounts are returned first. Contributions are not subject to taxation or the 10 percent premature-distribution penalty tax when distributed. In other words, you can always withdrawyour principal income tax free and penalty tax free for any reason.

When Do I Have to Start Taking Distributions From My Roth IRA?
You never have to take distributions from your Roth IRA. That's another advantage of the Roth IRA over the traditinal IRA. Assetsheld in a Roth IRA are not subject to age 70 1/2 required minimum distributions.

What Happens in the Event of My Death?
Your named beneficiary(ies) will receive the rights to the balance in your Roth IRA. Distributions to the beneficiary(ies) will be made in accordance with the required minimum distributions rules and your IRA agreement.

Can I Move Assets From a Traditional IRA to a Roth IRA?
The law allows a single or joint income tax filer with a MAGI of $100,000, or less, to convert his/her traditional IRA into a Roth IRA. For married taxpayers filing joint returns, the $100,000 limit for conversion eligibility applies to the couple's joint MAGI. A married individual who files a separate return is not eligible to convert. Specific rules may apply in this case; please seek professional tax or legal guidance.

Effective in 2010, the $100,000 MAGI requirement and the goint filing requirement for married individuals will no longer apply, making conversions available to everyone.

For a conversion to a Roth IRA, the amount converted will be subject to income taxes. However, the funds will not be subject to a 10 percent premature-distribution penalty tax.

What Is the Contribution Deadline for Funding a Roth IRA?
For a given taxable year, you can open and fund a Roth IRA any time between January 1 and the date your tax return is due for the year, excluding extensions. For most taxpayers, this is April 15 of the following year. The deadline may be extended in some situations. Examples include a presidentially declared disaster, a terroristic or military action, or service in a combat zone.

How Do I Open a Roth IRA?
Talk to any of our Member Service Representatives. We will explain the nature of these accounts in more detail, and help you complete the forms necessary to establish your Roth IRA.

The foregoing is intended to provide general information on federal tax laws governing Roth IRAs. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances. For specific information, you are encouraged to consult your tax or legal professional. IRS Publication 590, Individual Retirement Arrangements (IRAs) and the IRS's web site (www.irs.gov) may also provide helpful information.

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