Top 10 Roth IRA Questions Part 2

Top 10 Roth IRA Questions
Q. I intend to retire at 50. When I do, I'll need income. Can I take money from my Roth IRA without paying any taxes or penalties?
A. Potentially, yes. Under the IRS ordering rules, you are allowed to remove your original contributions at any time without tax or penalty. In addition, after you've waited at least five tax years, you're able to withdraw your original converted amounts without taxes or penalties. It's only when you get to the earnings generated by the original contributions and conversions that you will have a tax and/or penalty problem.Even if you do determine that you'll have to break into the earnings before you reach age 59 1/2, you may still be able to avoid the penalty -- but not necessarily the tax. If you remove the funds from your Roth IRA account using a distribution method that is part of a scheduled series of substantially equal periodic payments made over your life expectancy (and the life expectancy of your beneficiary), you may still be penalty-free.
Q. When I convert my regular IRA to a Roth IRA, do I have to pay the taxes all at once?
A. Yes. You're required to report the entire conversion income in the year of conversion. There was a one-time option to spread out conversion income when Roth IRAs first came out in 1998, but that option is no longer available.
Q. If I convert my IRA to a Roth IRA, will that income increase my adjusted gross income for the current year?
A. Absolutely. The income you have to report for an IRA conversion to a Roth IRA will have an impact on all tax issues that are based on AGI -- except for any direct Roth contribution and/or conversion issues. In other words, if you meet the AGI limitation rules to convert or contribute to a Roth before taking the conversion income into consideration, this income won't make you ineligible based on an increased AGI. But any tax provisions that use AGI as a guidepost will be affected -- including medical expenses (7.5% AGI floor), miscellaneous deductions (2% AGI floor), taxability of Social Security (based on AGI), passive loss limitations (based on AGI), and many others.In some cases, your AGI may be severely affected. You must take that into consideration when you decide to make a Roth IRA conversion.
Q. If I have a large tax balance due next April because of my Roth IRA conversion, will I be able to avoid the underpayment penalties related to estimated taxes?
A. No. You can't be exempted from the underpayment penalty just because the balance due was caused by a Roth IRA conversion. There are other exceptions to the underpayment penalty that you might want to review, since they may allow you to dodge the penalty, but there is no "safe harbor" simply because the underpayment was caused by a Roth IRA conversion.
Q. I've heard from a friend that the AGI limitation for a Roth IRA is $100,000. I've heard from other friends that the actual AGI limitation is much higher. Which is it?
A. It depends on whether you're talking about a conversion or a contribution.If you're talking about converting your regular IRA to a Roth IRA, then the AGI limitation is $100,000 for all filing categories, except for married folks filing separately. They're effectively prohibited from making a conversion no matter how small their AGI is, unless the couple is separated and has lived apart for the entire tax year.But, if you're talking about making a contribution to a Roth IRA, then the rules are a bit different. The AGI limitations depend on your filing status. If you're single and your 2007 modified AGI is less than $116,000 (or married with modified AGI of less than $166,000), you'll be eligible for at least a partial Roth IRA contribution.