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Be sure to speak with a qualified tax advisor to verify the consequences of transactions involving your IRA.
Q: Can I convert my current Traditional IRA to a Roth IRA?
A: Yes, in most cases. It requires that you complete a few forms and be prepared to pay the tax liability on all or part of the amount converted. Persons with Adjustable Gross Income over $100,000 or with filing status of Married, Filing Separately, are not eligible to convert to a Roth IRA.
Q: When may I withdraw funds from my Roth IRA?
A: There are two separate conditions for a Roth IRA that affect the withdrawal eligibility. A conversion refers to the process that transfers a Traditional IRA (which may have been purchased with federal tax-deductible funds) into a Roth IRA (which requires that the original funds be taxed upfront). A contribution refers to a new funds being deposited into a Roth IRA account.
Converted funds must remain on deposit for at least 5 years and until the saver has reached the age of 59 1/2 or there will be withdrawal penalties, except under certain special circumstances that permit early withdrawal.
Contributions to a Roth IRA may be withdrawn at any time without tax or penalty. Withdrawal of earnings without federal tax or penalty may begin after the account has been open at least five years and the saver is 59 1/2 or older, except under certain special circumstances that permit earlier withdrawal.
Q: How do I choose between a Roth and Traditional IRA?
A: Each type of IRA has its own advantages. Generally, the longer the funds will remain on deposit, the more advantageous the Roth IRA, even though you pay taxes going in on invested funds. The advantage of not paying taxes on distributions during retirement may far outweigh the advantage of making tax-deductible contributions to a Traditional IRA, followed by paying taxes on distributions after you retire.
Q: May I have both a Roth and Traditional IRA?
A: Yes. You may choose to have both, as long as your combined contributions do not exceed the maximum allowable for IRAs in the year of your contributions.
Q: What is Adjusted Gross Income?
A: This figure is in the last box on page 1 of IRS Form 1040. Generally, it includes all your earnings (wages, salary, dividends, interest, capital gains (or loss), alimony, royalties, etc.) minus certain deductions. The deductions you take to calculate your AGI are: deductible IRA contribution, student loan interest, certain moving expenses, one-half of self employment tax, self-employment insurance cost, penalties on early withdrawal of savings, and deductible alimony payments. These are sometimes called "above the line" deductions and do not include, for example, your itemized deductions, standard deduction or personal and family exemptions.
That said, the actual figure for determining deductibility of Traditional IRA contributions is really a modified Adjusted Gross Income. To reach that figure, you add back the IRA deduction (if any), the student loan interest, deductible EE Savings Bond interest used for higher education; and certain special employer payments and foreign payments. When talking about eligibility to contribute to a Roth IRA, references to AGI mean Modified AGI.
Q: I can withdraw up to $10,000 of Roth IRA contributions and earnings to buy a home. What is the definition of a first-time home buyer as it relates to a IRA withdrawal?
A: A first-time home buyer is defined for Roth IRA distribution purposes as a person who has not owned a home for at least two years. This special withdrawal option can be used for your home, your parents', your children's or your grandchildren's home.
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