IRA Information

Despite Roth IRA retirement accounts having been around for more than a decade, there are still many questions that people have. Some people are unclear on all the rules associated with a Roth IRA. Below, you will find the most commonly asked questions and answer that will help you grasp the entire concept of a Roth IRA and retirement plan investing.

Question #1: I have a custodian that says I cannot put annual contributions into an account that has been converted, yet I want to make contributions to my IRA. Is this true? And if so, what should I do?

Legally, there is no reason why you should have to separate your contribution and conversion funds into different accounts. Based on the old Roth IRA rules, conversions and Roth IRA contribution limits had different tax year start times. These times were dependent on the date of the conversion or contribution. Because of this, the IRS stated that conversions and contributions should be held in separate accounts.

However, the rules were changed with the Tax Reform Act of 1998. Now, there is no rule stating that these funds must be separate. It is possible, and acceptable, for you to combine your conversions and contributions. The staggered start times between contributions and conversions remains the same, but the rules regarding them are clearly stated and easy to understand.

If you have a financial advisor or Estate Street Partners who suggests that the funds remain separated, be sure to inform them that the new law removed those restrictions and it is now possible. Fact of the matter is, maybe you should be looking for a new advisor that knows what they are talking about.

Question #2: Can I contribute part of my Social Security benefits to a Roth IRA account?

Unfortunately, the answer to this question is no. In order to contribute to, and follow Roth IRA rules, you must do so with earned income. Generally, any money that is reported on your W-2 form is considered earned income. This does not include pension payments, interest, rental income, Social Security benefits, dividends or capital gains. Alimony can be considered earned income and can be contributed to the account.

Question #3: Is it possible for my 16-year old teenager make a Roth IRA contribution?

No matter what the age is, as long as someone has earned income and meets the adjusted-gross-income limitations, he or she can contribute to a Roth. Earned income is the major qualifying point when opening a Roth. As long as the individual has some form of earned income, they are able to open an account. An individual can only contribute 100% of earned income to an account. Therefore, if your 16 year old Joey earns $1500 for his summer job, he is limited to a $1500 contribution. If you decide to pay him for the household chores, this can also be counted as well toward his income.

Question #4: I recently converted my regular IRA to a Roth and I have just found out that my AGI will exceed the limitation of $100,000. What should I do?

It is possible to change your Roth IRA back to a traditional account. There are no IRA penalties or taxes when this is done. The only requirement is that the conversion back to a traditional IRA has to be completed by October 15 of the following year. No matter when you make a conversion, the "re-characterization" of your IRA retirement plan will not take effect until October 15 of any given year. When you convert back to a traditional account, you will be required to convert the original amount as well as any earnings that have been added to the account that were a result of the original conversion.

If you realize you will be over the AGI limit, consult your financial advisor or Estate Street Partners as soon as possible to begin converting back to the original traditional account. The limits get confusing for individuals that earn between $100,000 and $116,000 and contribute to their Roth, but for converting, the limit is $100,000. Depending on the situation there could be a prorated contribution allowed when making contributions, but not when converting.

Question #5: If my parent is 73, can he or she convert a traditional IRA to a Roth?

This is a common question, and like the first question posed, age is not a factor. As long at the individual has a gross income of less than $100,000, they are eligible to make the conversion to a Roth IRA. If minimum distributions are required when the conversion is made, those funds will not count against the limitation of $100,000. In short, as long as the Roth IRA limits are not exceeded, anyone can convert to a Roth IRA, regardless of age.