Roth IRAs

Consider Saving for Retirement in a Roth IRA

Your Financial Advisor can help you determine whether a Roth IRA or a Traditional IRA is most suitable for your situation. However, you might find the information below helpful as you consider your alternatives.

Features of a Roth IRA
Funding a Roth IRA
Distributions from a Roth IRA
Contact your Financial Advisor for more information about Roth IRAs

Features of a Roth IRA

Although annual Roth IRA contributions are not tax-deductible, there are other features that may make the Roth IRA an attractive alternative for many investors. Consider these features of the Roth IRA:

  • Account balances have the opportunity to accumulate tax-free.
  • Annual contributions may be distributed at any time without federal income tax or IRS penalty. (Removal of an excess contribution may trigger tax and penalty.)
  • Distributions in retirement may be income-tax-free.
  • Contributions can be made after age 70 1/2 as long as you (or your spouse - if married filing jointly) have earned income. Modified adjusted gross income (MAGI) limits apply.
  • There are no required minimum distributions (RMDs) starting at age 70 1/2. (Note: there are required distributions to Roth IRA beneficiaries after the owner's death)
  • Traditional, SEP and SIMPLE IRA balances can be converted to a Roth IRA. (SIMPLE IRAs are subject to a two-year hold requirement before conversion. Required minimum distribution amounts are not eligible for conversion.)
  • Eligible rollover distributions from an employer-sponsored retirement plan balance can be converted to a Roth IRA1.

    Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and has distinct advantages and disadvantages.

    1. Roll assets to an IRA
    2. Leave assets in your former employer’s plan
    3. Move assets to your new/existing employer’s plan
    4. Cash out or take a lump sum distribution

    When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty-free withdrawals are available, treatment of employer stock, when required minimum distributions may be required, and protection of assets from creditors and legal judgments. The costs of investing and maintaining assets in an IRA with us will generally involve higher costs than the other options available. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.

  • The Roth IRA can provide tax-free income for your beneficiaries after your death if certain requirements are met.

Contact your Financial Advisor for more information about Roth IRAs.

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Funding a Roth IRA

To be able to contribute to a Roth IRA, you (or your spouse if married filing jointly) must have earned income, which includes wages, salary, tips, bonuses and commissions. (Earned income does not include rental, interest, dividend, pension, annuity or deferred compensation income.)

Roth IRA contribution eligibility requirements. Participation in your employer's retirement plan does not prevent you from contributing to a Roth IRA. Instead, your modified adjusted gross income (MAGI) may limit your contributions.

2014 | 2015

2014 Roth IRA Contribution Modified Adjusted Gross Income (MAGI) Limits
Filing Status Full Contribution Partial Contribution No Contribution
Single Less than $114,000 $114,000 to $129,000 $129,000 or more
Joint Less than $181,000 $181,000 to $191,000 $191,000 or more
Married, filing separately2 Not eligible $0 to $10,000 $10,000 or more
2015 Roth IRA Contribution Modified Adjusted Gross Income (MAGI) Limits
Filing Status Full Contribution Partial Contribution No Contribution
Single Less than $116,000 $116,000 to $131,000 $131,000 or more
Joint Less than $183,000 $183,000 to $193,000 $193,000 or more
Married, filing separately2 Not eligible $0 to $10,000 $10,000 or more

For the purpose of Roth IRA contributions, your MAGI is determined by adding back the following deductions and exclusions to your Adjusted Gross Income (AGI) (if any apply):

  • Traditional IRA deduction
  • Student loan interest deduction
  • Tuition and fees deduction
  • Foreign earned income exclusion from Form 2555/Form 2555EZ
  • Foreign housing exclusion or deduction from Form 2555
  • Qualified bond interest from Form 8815
  • Employer-paid adoption expenses from Form 8839
  • Domestic production activities deduction

Note: For the purpose of Roth IRA contribution limits, you must also subtract any income resulting from a Roth conversion in order to arrive at your MAGI.

Roth IRA contribution limits. The annual IRA contribution limit of $5,500 for 2014 and 2015 applies to contributions made to both Traditional and Roth IRAs combined. That means if you contribute $2,000 to your Traditional IRA, you can only contribute $3,500 to your Roth IRA in a specific year. However, if you are age 50 or older, you can also make catch-up contributions, which is $1,000 annually, putting your maximum IRA contribution at $6,500 for 2014 and 2015.

You and your Financial Advisor can work with your tax advisor to determine whether you are eligible to contribute to a Roth IRA and how much you may want to contribute each year.

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Distributions From a Roth IRA

Distributions from a Roth IRA are potentially federally tax-free and IRS penalty-free as long as certain rules and requirements are met.

Qualified Roth IRA distributions. A qualified distribution allows for tax-free distributions of the Roth IRA earnings. In order to qualify, the distribution must occur after satisfying the five-year holding period and one of the following:

  • You are age 59 1/2 or older.
  • You are disabled.
  • The funds are for qualified first-time home buyer ($10,000 lifetime limit).
  • The funds are distributed to a beneficiary after your death.

Taxable Roth IRA distributions. Annual contributions made to a Roth IRA can be distributed at any time without incurring federal income tax or IRS penalties (except excess contributions). However, Roth IRA investment earnings that are distributed may be taxable unless they are qualified Roth IRA distributions (see above). Additionally, if under age 59 1/2, a 10% penalty may apply to the earnings distributed.

Contact your tax advisor for more information regarding the taxation of Roth IRA distributions.

When IRS 10% penalty applies. Distributions of converted balances prior to age 59 1/2 in the first five years from the conversion may trigger an IRS 10% premature distribution penalty. Each conversion has its own five-year holding period for this purpose. In addition, distributions of Roth IRA earnings prior to age 59 1/2 may also be subject to this penalty. There are exceptions to this early distribution penalty including:

  • Attaining the age of 59 1/2
  • Death
  • Disability
  • First time home buyer ($10,000 lifetime limit)
  • Medical expenses exceeding 10% of your adjusted gross income
  • Certain unemployed individual's health insurance premium
  • Qualified higher education expenses
  • Substantially Equal Periodic Payments (SEPP)
  • Qualified Reservist distributions
  • IRS levy

Order of Roth IRA distributions. Roth IRA distributions are taken in the following order:

  • Annual Roth IRA contributions
  • Balances converted from Traditional IRAs, SEP IRAs, SIMPLE IRAs (after two years), 401(k)s, and other employer-sponsored plans
  • Roth IRA investment earnings

Each category must be completely distributed before moving on to the next category. For purpose of the ordering rules, all Roth IRAs you own are considered as one. That is, if you have more than one Roth IRA, you must distribute the total of your annual contributions from all accounts before taking distributions of converted balances and/or earnings.

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Contact Your Financial Advisor for More Information About Roth IRAs

Determining how you should save for retirement is an important decision. Contact your Financial Advisor for help with the retirement planning process and for help in determining whether a Roth IRA is right for your particular situation.

This material is provided for informational purposes only and is based on sources that are considered reliable; however, the accuracy of the information is not guaranteed. It is made available with the understanding that Wells Fargo Advisors is not engaged in rendering legal, accounting or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax or legal consequences.

1 Conversion to a Roth IRA triggers tax liability on any taxable amount converted.

2 If an individual did not live with his or her spouse at any time during the year, their filing status is considered as single for this purpose.

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