Earnings within a Roth IRA are tax free, so are these earnings included in the modified adjusted gross income which is used to determine Roth IRA eligibility?

By Denise Appleby AAA
A:

There are two possible answers to this question, depending on whether or not the distribution from the Roth IRA is qualified.

Earnings on investments within a Roth IRA are neither subject to income tax nor are they included in the IRA owner's income. Instead, they accumulate on a tax-deferred basis and are tax free when withdrawn from the Roth if the distribution is qualified.

If an individual receives a distribution from his/her Roth IRA and the distribution is qualified and therefore tax free, the amount is not included in the individual's income - therefore, it is not included in the modified adjusted gross income (MAGI) to determine Roth IRA eligibility. However, if the distribution is not qualified, then the amount attributable to earnings is included in the individual's MAGI to determine Roth IRA eligibility.

(To learn more about Roth IRAs, check out our Roth IRA Tutorial, Tax Treatment Of Roth IRA Distributions and Roth IRA: Back To Basics.)

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS

  1. Are progressive taxes ever more unfair that flat taxes?

    Learn more about progressive taxes and flat taxes. Find out why progressive taxes may be unfair for many taxpayers and why ...
  2. Is a progressive tax more fair than a flat tax?

    Find out which is more fair: flat tax or progressive tax. Learn about both sides of the debate and the challenges of defining ...
  3. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ...
  4. What are the pros and cons of a progressive tax policy and who benefits the most ...

    Find out who may be opposed to a progressive tax hierarchy. Learn the pros and cons of such a taxation policy and who it ...
RELATED TERMS
  1. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  2. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  3. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  4. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  5. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  6. Gold IRA

    Definition of Gold IRA

You May Also Like

Related Articles
  1. Retirement

    Top 10 Stocks for Retirement Portfolios

  2. Trading Strategies

    Top 7 Roth IRA Stocks for 2015

  3. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

  4. Professionals

    Are Longevity Annuities in 401(k)s a ...

  5. Professionals

    Why Retirement Advice Is Better But ...

Trading Center