Roth IRA

The Roth IRA is a nondeductible account that features tax-free withdrawals for certain distribution reasons after a five-year holding period.

Contributions

You may contribute up to 100% of your earned income, up to $5000 in 2008 and $5000 plus COLA in 2009, as long as your MAGI is within prescribed limits. It is important to note that $5000 is the aggregate amount that you can contribute to any Roth and/or traditional IRA in a given year. For example, if you contribute $2500 to a traditional IRA, you can only contribute $2500 to a Roth IRA for that year.

Taxes

If you take your earnings as part of a qualified distribution, you do not pay taxes on the earnings. Unlike a traditional IRA, you cannot take a tax deduction for any contributions that you make to a Roth IRA. However, when you're ready to take a withdrawal, you pay no taxes on any of the earnings that your money has generated.

Phaseout MAGI Thresholds

Qualified Distributions

For tax free and IRS penalty free earning:

• The IRA must be held for five years. This period begins with the tax year for which the first contribution is made
• Distributions made on or after the date on which you attain age 59 1/2
• Distributions made to your beneficiary or estate upon your death
• Distributions attributable to your being disabled
• Qualified first-time home buyer distributions (up to $10,000)

Distributions that are subject to taxes (on any earnings withdrawn) but no penalty include:

• Substantially equal periodic payments
• Eligible medical expenses in excess of 7.5% of your adjusted gross income (AGI)
• Medical insurance premiums for eligible unemployed individuals
• Qualified 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.

Distributions taken for any reason other than a qualified reason or a reason listed above are subject to both taxes and a 10% IRS penalty on any earnings withdrawn. Original contribution amounts (as opposed to earnings) are returned first. Therefore, you can always get back your principal tax free and IRS penalty free for any reason.

Mandatory Distributions

A benefit of the Roth IRA is that you never have to take distributions. Assets held in a Roth IRA are not subject to age 70 1/2 required minimum distribution.

Moving Funds Between IRAs

The law allows people (single or married) with a MAGI of $100,000 or less to convert their traditional IRA into a Roth IRA. For a conversion to a Roth IRA, the amount converted will be subject to full taxation. However, the funds will not be subject to a 10% premature distribution penalty. Rollovers from a traditional IRA to a Roth IRA are not subject to the one rollover per 12-month rule.