There are a lot of moving parts associated with the Roth IRA, which is one of my favorite investments. But if you’re thinking of creating an account for yourself, these top 10 Roth IRA questions and answers should address some of the more common queries.
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1. Can a Roth IRA be inherited?
Yes. In fact, it’s called an Inherited Roth IRA. But the tax rules will differ if you’re a spouse versus a non-spouse. If you’re the surviving spouse, you can simply move the deceased spouse’s Roth IRA under your name or combine it with your own personal Roth IRA. The tax rules will remain essentially the same.
On the other hand, if you’re a non-spouse who inherited a Roth IRA, you have two options. You can take out all of the money from the Roth IRA as a tax-free lump sum. Or you can roll it over to a new Roth IRA and choose to spread out required minimum distributions over your life expectancy. The benefit of this option is that the investments can continue to grow untaxed, and you can continue to make contributions to the new Roth IRA.
2. Can Roth IRA be converted to Traditional IRA?
Yes. But in technical lingo it’s called “recharacterizing” your Roth IRA. Typically, this occurs when someone converts their Traditional IRA to a Roth IRA in the prior year and now wants to reverse the change in the current year.
The reason for their reversal is because they realize that the tax hit they took by converting to the Roth was just too much. So the government provides a grace period each year where people who regretted their decision can switch back and reclaim those taxes.
3. Can I deduct Roth IRA contributions on my tax return? or Can Roth IRA contributions be deducted? or Does a Roth IRA reduce taxable income?
No, to all three questions. When you make contributions to your Roth IRA, you’re putting in dollars that have already been taxed. And what makes the Roth IRA so attractive is that the contributions won’t be ever taxed again. Nor will you have to pay taxes on investment profits as long as you don’t touch this money prior to age 59.5.
If you want to be able to deduct contributions from your tax return and post-pone paying taxes until later in life, then you should look into a Traditional IRA?
4. Can Roth IRA be used for home purchase?
Yes. But you have to be a first time home buyer. Don’t panic. This simply means that you haven’t owned a home or had an ownership interest in a home for the last 2 years. If you quality, you can withdraw up to $10,000 without incurring any taxes. To qualify, your Roth IRA must be at least 5 years old.
5. Can Roth IRA contributions be withdrawn?
Yes. You can withdraw your personal contributions any time you like. You just can’t touch the profits in the account with being hit with taxes, including a tax penalty. Of course, you won’t pay any taxes if you leave the money alone until you reach age 59.5.
6. Can Roth IRA invest in real estate?
Yes. This can happen in a couple of ways. First, you can invest in Real Estate Investment Trusts (REITs). REITs are basically corporations that build and manage major properties such as malls, office buildings, apartment complexes, etc.
Second, you can purchase properties directly. However, the rules can be a little tricky so you’ll want to work with a financial professional to make sure you don’t make mistakes. For example, you’re not allowed to be involved with managing the property in any way. This includes collecting rents, maintenance, finding tenants, etc.
7. Does a Roth IRA have Required Minimum Distribution (RMD)?
Depends. In the normal scheme of things, a Roth IRA doesn’t have an RMD like the Traditional IRA does. However, if you recall Question #1 above, the RMD rule can kick in if the Roth IRA is inherited.
8. How is a Roth IRA tax free?
In case you didn’t know it, there are several different kinds of Individual Retirement Accounts. They share some common elements, but also differ in other ways. The Roth IRA represents another way that the federal government has devised to get people to save more money toward their retirement.
Under the rules for this IRA, the dollars that you initially contribute have already be taxed by the U.S. government. So in the that respect, it’s not really tax free. But other than that, if you allow the contributions and investments to grow untouched until you reach age 59.5, you’ll never hear a peep out of the government every again about taxes.
9. How many Roth IRAs can I have?
One Billion! Okay, I’m just messing with you a little bit. I said one billion because you can have as many Roths as you like because what really matters is the annual contribution limit.
Every year, the IRS establishes the maximum amount that you can contribute to your IRA(s). For example, if the max limit for the year was $6,000, you can direct the entire sum toward one IRA or split it among several. And again, it doesn’t matter whether the IRAs are Roth, Traditional, or a combination. Just don’t exceed the annual amount in total.
10. What are excess Roth IRA contributions?
As I mentioned in Question #9, each year there is a maximum dollar amount that you can contribute to a Roth IRA. But despite the stated limit, people will inadvertently exceed it. In some cases, it can be based on just pure forgetfulness or a simple miscalculation. In other instances, it could occur if your income unexpected spiked and you no longer qualify for the maximum contribution.
But if the limit is $6,000 and you contributed $7,000, that’s an excess of $1,000. If you don’t correct the overage, you’ll have to pay a 6% penalty tax ($1,000 x 6%= $60) every year until the excess is reduced.
A couple of easy ways to correct the overage is to either make a withdrawal from the account for the overage amount or reduce the contribution amount by the overage amount for the next year.
So do you have anything to add to these top 10 Roth IRA questions and answers? If so, leave your thoughts and comments below.
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