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Roth IRA

Q&A: Roth IRA

October 13, 2014 By Liz Weston

Dear Liz: I have a 401(k) that has a required annual distribution because I am over 71 1/2 years old. Can I use this distribution as qualified income to invest in a Roth IRA? I have no W-2 earnings, although I do have other income sources that are reported on 1099 forms.

Answer: To contribute to a Roth or other individual retirement account, you must have taxable compensation, which the IRS defines as wages, salaries, commissions, tips, bonuses or net income from self-employment. The IRS also includes taxable alimony and separate maintenance payments as compensation for IRA purposes.

So if the money reported on one of those 1099 forms is from self-employment income, then you can contribute to a Roth IRA. If the form is reporting interest and dividends or other income that doesn’t meet the IRS definition of taxable compensation, then you’re out of luck.
If you don’t have income that meets the IRS definition of taxable compensation, but your spouse does, you may still qualify for IRA contributions, provided you file a joint return that meets the required income thresholds.

Filed Under: Investing, Q&A, Retirement Tagged With: 401(k), q&a, Retirement, Roth IRA

Monday’s need-to-know money news

April 7, 2014 By Liz Weston

Zemanta Related Posts ThumbnailToday’s top story: The tax mistake you cannot afford to make. Also in the news: The best time to shop for Christmas (seriously), how to keep your kids out of debt, and how to use your Roth IRA as an emergency fund.

The 1 Tax Mistake You Must Not Make
Making sure your figures match.

Best Time to Shop, Save for Christmas? Now
It’s practically right around the corner!

5 Tips for Keeping Your Kids (and Grandkids) Out of Debt
Teaching the value of money during Financial Literacy Month.

How To Use Your Roth IRA As An Emergency Fund
Not just for retirement.

Negotiate Your College Financial Aid to Get the Best Deal
If done right, the school of your choice could match your best offer.

Filed Under: Liz's Blog Tagged With: financial aid, financial literacy, holiday shopping, holiday spending, Roth IRA, Taxes

5 LAST-MINUTE MONEY MOVES BEFORE 2014

December 23, 2013 By Liz Weston

Tax return checkOkay, you’re on overload with all the last-minute shopping, cooking, preparing for guests and/or traveling. But try to squeeze in a few money tasks before year-end. Including:

Contribute to an IRA. You can put money into an IRA even if you have a retirement plan through work, but you may not be able to deduct the contribution if your income is over certain limits. If, on the other hand, your income is low, you could score a valuable tax credit for your retirement contributions. The problem of course is that it can be tough to come up with the maximum contribution of $5,500 ($6,500 for those 50 and over) at year end. Luckily, you have until tax day, April 15, 2014, to make your contribution for 2013. And consider setting up regular contributions to your IRA so you don’t have to scramble for the cash next year.

Make a (back door) Roth contribution. If you can’t deduct an IRA contribution, a better option is to contribute to a Roth IRA. Roth contributions aren’t deductible but withdrawals from the accounts are tax-free in retirement (unlike regular IRA withdrawals, which incur income taxes). If your income is too high to contribute to a Roth directly, you can contribute to a regular IRA and then convert it to a Roth. This works best if you don’t already have a fat IRA account, since your tax bill for the conversion will be based on the total you have saved in regular IRAs.

Use it or lose (most) of it. If you have money set aside in a flexible spending account at work for medical or child care expenses, you typically need to use it up by year end. There are some exceptions: the Treasury Department recently said plan participants can roll up to $500 of unused funds into the next year’s plans, and some employers extend the deadline from Dec. 31 to mid-March.

Accelerate and delay. If you don’t expect a big change in your tax circumstances, it can make sense to delay income into 2014 (by asking your boss to pay a bonus next year instead of this, for example) and to accelerate deductions by paying mortgage, property tax or medical bills for January in December.

Get generous. If you itemize your deductions, you can get a tax break for your charitable contributions. Again, rushing to get those in at the last minute isn’t ideal, so consider setting up regular contributions such as paycheck deductions or monthly payments to your favorite nonprofits. No extra cash? “Noncash” donations—such as clothes or household items—can earn you a deduction as well. They just have to be in good condition and given to a recognized charity.

 

Filed Under: Liz's Blog Tagged With: back door Roth, charitable contributions, flexible spending plans, IRA, Retirement, Roth conversion, Roth IRA

How to start Roth IRAs for your kids

December 16, 2013 By Liz Weston

Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

Filed Under: Kids & Money, Q&A, Retirement Tagged With: IRA, Roth, Roth IRA

Missed deadline could limit inherited Roth IRA’s benefits

September 3, 2013 By Liz Weston

Dear Liz: I inherited my brother’s Roth IRA about three years ago. I find it hard to get any information about non-spousal inherited Roths. Can you tell me more about this type of Roth IRA?

Answer: It may be unfortunate that you didn’t ask sooner.

When a spouse inherits a Roth IRA, he can roll it into his own Roth IRA, and it’s as if he or she was the owner of the inherited funds all along. There’s no minimum distribution requirement, so the money can continue to grow.

If you’re not a spouse, you have the option of transferring it into an account titled as an inherited Roth IRA. You also have the option of taking distributions over your lifetime — which means keeping the bulk of the money growing for you tax-free — but to do that you must begin taking required minimum distributions by Dec. 31 of the year after the year in which the owner died.

If you didn’t start these required distributions on time, you have to withdraw all the assets in the account by Dec. 31 of the fifth year after the year your brother died, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. You won’t have to pay taxes on this withdrawal, but it would have been better to let the money continue to grow tax-free in the account.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: inherited Roth, inherited Roth IRA, Roth IRA

Tax bills for inherited IRAs

August 19, 2013 By Liz Weston

Dear Liz: I am 64. My grown children, ages 23 and 25, are the beneficiaries of my retirement accounts. I have a Roth IRA, a SIMPLE IRA and a Rollover IRA. When I die, what will be the tax consequences for them? Will they have to pay any tax upon inheriting the accounts, and will they have to pay any tax when they withdraw the money over time?

Answer: If your estate is worth less than $5 million, it’s unlikely it will incur federal estate taxes. Some states have lower exemption limits and a few have inheritance taxes. New Jersey and Delaware have both. An online search for “state estate and inheritance taxes” should turn up the situation for your state.

Your children won’t have to pay income taxes on distributions from your Roth, but unlike you or a spouse they are required to take distributions once they inherit the account. They can either do so within five years of your death or they can opt to spread the distributions over their lifetimes (which is usually the better option).

Minimum distributions also will be required from your IRAs. Your heirs will have to pay income taxes on those distributions.

Advise your children to consult a tax pro after you die, since these accounts need to be properly handled and titled to get the most benefit.

Filed Under: Estate planning, Q&A, Retirement, Taxes Tagged With: estate tax, Individual Retirement Account, inherited IRA, inherited Roth, IRA, Roth, Roth IRA, roth vs. IRA, traditional IRA

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