Roth IRA Questions & Answers

Question: What is a Roth IRA? Answer: A Roth IRA is a type of Individual Retirement Account (IRA) that was created under a law known as the Taxpayer Relief Act of 1997 and became available in 1998.

Question: I’ve owned an IRA prior to 1997, is it a Roth IRA?

Answer: Probably not. Prior to 1998, Roth IRAs didn’t exist. More than likely, yours is known as a traditional (regular) IRA.

Question: What’s the difference between a traditional IRA and a Roth IRA?

Answer: Before we discuss the differences, let’s talk about the similarities. Neither the traditional IRA nor the Roth IRA is an investment; they are both types of accounts. The investment(s) would be a certificate of deposit (CD), stock, bond, mutual fund, or money market fund, in any combination. Your investment may earn interest (bonds, bond-oriented mutual funds, and money market funds) or dividends (stocks and stock-oriented mutual funds) and may increase in value, commonly known as a capital gain (mostly associated with stocks and stock-oriented mutual funds).

For the most part, all income is taxable. However, when an investment is held in a traditional IRA, those earnings (interest, dividends, and capital gains) are considered tax-deferred, meaning that you pay taxes at some point in the future, i.e., when money is withdrawn from a traditional IRA. In the case of a Roth IRA, when the owner reaches the age of 59½ AND the Roth IRA has been established for at least five (5) years, its withdrawals are TAX-FREE.

​TRADITIONAL IRA = TAX–DEFERRED​ (you pay taxes as some point in the future)

vs.

​ROTH IRA = TAX-FREE​ (you never pay taxes, when age and account establishment criteria are met)

Question: What can I do with the traditional IRA that I already have? Answer: It is possible to convert a traditional IRA to a Roth IRA. You will be taxed on the total amount of the conversion, but you will pay taxes once on that amount and never have to pay taxes on distributions from that IRA once it has been converted to a Roth IRA.

Question: Am I automatically eligible to establish a Roth IRA? Answer: No. In order to establish and contribute to a Roth IRA, the owner must have earned income.

Question: What is earned income? Answer: Earned income is income that is derived from active employment, including self-employment, in the form of wages, salary, tips, commissions, and bonus. Rental income is considered passive or unearned income. Other forms of unearned income would be social security, disability income, and pension benefits, among others.

Question: How much can I contributed to a Roth IRA? Answer: The maximum contribution allowed is $5,500 for 2013 for individuals younger than 50 years old. Persons 50 and above may contribute an additional $1,000 (considered a catch-up contribution) for a total of $6,500 each year.

Question: Are my contributions in a Roth IRA tax deductible? Answer: No, contributions to a Roth IRA are never tax-deductible. However, not all traditional IRA contributions are deductible. If you are single and earn more $69,000 and your employer offers a retirement plan, then your contributions to a traditional IRA are NOT deductible. If you are married and file jointly, and your combined income is more than $115,000 per year, your contributions are NOT deductible.

Question: If my contributions are not deductible, then why should I have a Roth IRA? Answer: Keep in mind that virtually all income is taxable. Pension income is taxed, so is rental income, income from annuities, IRA distributions, 401(k) distributions, 403(b) distributions, as well as other types of deferred compensation plans. All of these sources of income can be taxed as high as 35%. (Note: As of late November 2010, Congress will be debating the elimination of the Bush-era tax cuts, which could result in the highest tax rate returning to 39.6%). Without distributions from a Roth account, chances are that you will not have a source of income that’s TAX-FREE in retirement.

Question: Since traditional IRAs and a Roth IRAs are not investments, but rather accounts for investments, what type types of investments are appropriate for them? Answer: You can own the exact type of investment in a traditional IRA as you can in a Roth IRA. That means that CDs, stocks, bonds, mutual funds, and annuities can be held in a traditional and Roth IRA. The difference is the tax treatment at withdrawal – if the withdrawal is coming from a traditional IRA it’s taxed as ordinary income, but if it’s coming from a Roth IRA, and you’ve met criteria listed above, then it’s not taxed.

Question: What if I have additional questions about the Roth IRA or other types of investment concepts, what should I do? Answer: Call the Jones Wealth Management Group at 901-312-9166 to schedule an complimentary appointment or email us at info@joneswealthmgmt.com.

This information should not be used for a basis for tax advice. You should seek the guidance and advice of your own tax counsel.