Roth IRA

Income Tax Contributions to a Roth IRA are made with after-tax dollars Unlike deductible contributions to a traditional IRA, you do not have the option of deducting Roth IRA contributions and reducing your taxable income on your federal income tax return. You can contribute only after-tax dollars to a Roth IRA.

Qualified distributions are tax free A withdrawal from a Roth IRA (including both contributions and investment earnings) is completely tax free (and penalty free) at the federal level if made at least five years after you first establish any Roth IRA, and if one of the following also applies:

You have reached age 59½ by the time of the withdrawal The withdrawal is made due to qualifying disability The withdrawal is made to pay for first-time homebuyer expenses ($10,000 lifetime limit) The withdrawal is made by your beneficiary or estate after your death Tip: The five-year holding period begins on January 1 of the tax year in which you make your first contribution (regular or rollover) to any Roth IRA. Each taxpayer has only one five-year holding period for this purpose.

Even if a withdrawal does not qualify for tax-free treatment, only the portion representing earnings is taxable If you make a withdrawal from a Roth IRA that does not meet the above conditions, the portion of the withdrawal that represents investment earnings will be subject to federal income tax at ordinary income tax rates (even if the funds represent long-term capital gains or qualifying dividends), and may also be subject to a 10 percent premature distribution tax if you are under age 59½. However, the portion of the withdrawal that represents Roth IRA contributions will not be subject to federal income tax or penalty as those dollars were already taxed. Roth IRA withdrawals are treated as being made from contributions first and investment earnings last. All of your Roth IRAs are aggregated when determining the taxable portion of your nonqualified distribution.

Technical Note: Technically, a distribution from a Roth IRA that is not a qualified distribution, and is not rolled over to another Roth IRA, is included in your gross income to the extent that the distribution, when added to the amount of any prior distributions (qualified or nonqualified) from any of your Roth IRAs, and reduced by the amount of those prior distributions that were previously included in your gross income, exceed your contributions to all your Roth IRAs. For this purpose any amount distributed to you as a corrective distribution is treated as if it was never contributed. Caution: If you convert funds from a traditional IRA to a Roth IRA, special rules may apply if you subsequently withdraw funds from the Roth IRA. See Converting or Rolling Over Traditional IRAs to Roth IRAs.

Gift and Estate Tax When you die, the assets in your Roth IRA are considered when determining if estate tax is due Unless you name your spouse as beneficiary (unlimited marital deduction) or a charity as beneficiary (charitable deduction), the full value of your Roth IRA at the time of your death is included in your taxable estate to determine if federal estate tax is due. In addition, your state may impose a state death tax.