ROTH IRA

[Guest s_pasemann]

I have been trying to research info on Roth IRAs and investing our money more wisely, but am confused by much of it. My questions on rolling a traditional IRA to a Roth are as follows:

I have $2K in a traditional IRA and want to roll in a Roth - once I roll it over, does that $2K count toward the maximum annual amount that I can put in?

If I roll the traditional into a roth, will I be taxed on the $2K?

If after the 5 year period I want to take out money, will I only pay 10% penalty, or will I be subject to other fees/tax? (i'm younger than 59.5)

What does the 'required beginning date' mean?

Are we able to take out money (in the future of course) to pay for a child's college education without penalty or tax? We've been reading about the 529 plan and don't know if it is a good idea to start one or choose other forms of investing.

I've been reading the information about roth iras on www.rothira.com and lots of the wording is confusing, which is why i have so many questions. Thank you very much for any info you have on the above.

-Sarah

[John G]

I have $2K in a traditional IRA and want to roll in a Roth - once I roll it over, does that $2K count toward the maximum annual amount that I can put in?

No. The rollover has no realtionship to annual contributions. However, the annual contributions for Roth and regular IRAs is based upon the combination of all contributions to all IRAs regardless of custodian and type of IRA. Note, if you make contributions to a regular IRA and then roll it over in the same year, those earlier contributions count against your limit. Of course, it does not make much sense to open a regular IRA and roll it to a Roth in the same year when you could just open the Roth directly.... but that is another story.

If I roll the traditional into a roth, will I be taxed on the $2K?

Yes. Rollovers are taxed as ordinary income. There are tax filing status and income restrictions to qualify for a rollover in any year.

The accountants will probably answer your other questions. I would recommend that you not start an IRA/Roth program and immediately think about taking money out. The whole purpose of this primo tax shelter is defeated if you don't use "time" as your friend and invest for the long term.

[Appleby]

The required beginning date is April 1 of the year following the year the IRA holder reaches age 70 ½. Traditional IRA (including SEP and SIMPLE) holders are required to start distributing a minimum amount from their IRA each year; this must begin by the aforementioned required beginning date.

The required beginning date does not apply to Roth IRAs

For more information on saving for children’s’ education, see the article at the following URL

http://www.investopedia.com/articles/retir...t/03/020503.asp

[Guest Trirod]

One important issue to note is that there is a big difference between the treatment of contributions that have been made directly to a Roth IRA and those that have been converted from a traditional IRA.

For direct contributions, you can take out the principal (not the earnings) at any time, for any reason without any penalty. This makes Roth IRA's very flexible and encourages maximum funding since it is not locking away your money. This is why a lot of people suggest that you should always fully fund a Roth (assuming you are eligible) before a s529 plan or Coverdell ESA (similar benefits, fewer restrictions). Of course, in an ideal world you should never touch the money in a Roth until you retire!

If you are under 59.5 then I believe the 5 year waiting period is irrelevant - I believe you will pay the 10% penalty on any withdrawals attributable to converted funds, before or after the 5 years.