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Roth IRA

What are Roth IRAs?

The Taxpayer Relief Act of 1997 created a new type of individual Retirement Account (IRA) named Roth IRAs. Roth IRAs are not tax-deductible when contributions are made (unlike the traditional tax-deductible IRAs), but earnings growth and retirement distributions can be tax-free.

Similar to traditional IRAs, earnings compound over time tax-deferred in a Roth IRA. In a Roth IRA, you can withdraw part or all of your money at age 59 ½ tax free as long as it has been in the account for at least five years. And, you are not required to withdraw your money when you are 70 ½ as required with a traditional IRA. Also, upon your death, your beneficiary will not owe taxes on the distributions.

Who is Eligible?

To be eligible to contribute the full amount to a Roth IRA, married couples filing a joint return must have a modified adjusted gross income that does not exceed $181,000 and single individuals must have a modified adjusted gross income which does not exceed $114,000. These people will have a contribution limit of $5,500 ($6,500 for individuals age 50 and over) per year, minus any amounts contributed to other IRAs. Single individuals with modified adjusted gross income between $114,000 and $129,000, and married couples filing jointly with adjusted gross incomes between $181,000 and $191,000, may contribute a proportionate reduction of $5,500.

Can you Convert A Traditional IRA to a Roth IRA?

Yes, you can convert (transfer or withdraw and contribute) all or part of your traditional IRA to a Roth IRA without an early distribution penalty. Generally, the distribution from your traditional IRA will be taxable. In other words, the amount of the distribution from your traditional IRA will generally be included in your gross income and subjected to ordinary income tax. You should carefully evaluate several factors in making a decision to convert to a Roth IRA including your age, your ability to pay any additional taxes as a result of the conversion, your current income bracket, and your estimated income bracket in retirement.

Can I Rollover Funds From a Qualified Employer Plan?

Many qualified employer plans such as a 401k, 403b, or 457(b) allow participants to rollover funds directly to a Roth IRA, with amounts rolled over being subject to the same rules as a conversion from a traditional IRA to a Roth IRA. In these instances many companies, including National Western Life, require funds from an employer plan to first move directly to a traditional IRA and to then be converted to a Roth IRA.

Tax-free Distribution Rules

Contributions to a Roth IRA are not deductible from your income, as contributions to a traditional IRA generally are. However, qualified distributions are generally free from federal income taxes if:

  • They are made a minimum of five years after contributions to the Roth IRA were made, and
  • They are made on or after the date you reach age 59 ½; or
  • They are made to a beneficiary or to your estate after your death; or
  • You are using the proceeds (up to $10,000 lifetime) for a first-time home purchase; or
  • You are disabled.

Withdrawals that do not meet these requirements may be taxable and subject to a 10% federal tax penalty.

Legal and Tax Advice

National Western Life does not authorize its producers or employees to give legal or tax advice. Representations contained herein are based on our understanding of current tax law and are for informational purposes only. For an explanation of how these laws apply to you, we encourage you to consult with an attorney, accountant or other tax advisor. State income tax treatment varies. Thus, the above information addresses only the federal tax treatment of Roth IRAs.