Funding an IRA
A Roth IRA can be funded from several sources:
- Regular contributions
- Spousal IRA contributions
- Rollover contributions
Regular Roth IRA Contributions
Every year, an individual may contribute 100% of compensation up to the following amounts:
|Tax Year||Regular Contribution Limit||Tax Year||Additional Catch-Up Contribution Limit|
Individuals who are age 50 and older by the end of the year for which the contribution applies can make additional catch-up contributions. For instance, an individual who is under age 50 may contribute up to $5,500 for tax year 2015, but an individual who reached age 50 by year-end 2015 may contribute up to $6,500.
All regular Roth IRA contributions must be made in cash (which includes checks); regular Roth IRA contributions cannot be made in the form of securities.
Spousal Roth IRA Contribution
An individual may establish and fund a Roth IRA on behalf of his/her spouse who makes little or no income. Spousal Roth IRA contributions are subject to the same rules and limits as that of regular Roth IRA contributions. The spousal Roth IRA must be held separately from the Roth IRA of the individual making the contribution, as Roth IRAs cannot be held as joint accounts.
In order for an individual to be eligible to make a spousal Roth IRA contribution, the following requirements must be met:
- The couple must be married and file a joint tax return.
- The individual making the spousal Roth IRA contribution must have eligible compensation.
- The total contribution for both spouses must not exceed the taxable compensation reported on their joint tax return.
- Contributions to one Roth IRA cannot exceed the contribution limits as detailed in the above chart. (For more insight, see Making Spousal IRA Contributions.)
A transfer is a nonreportable, nontaxable movement of assets between similar types of retirement plans. A Roth IRA owner generally transfers assets between Roth IRAs for the purpose of consolidating assets or changing financial institutions.
A transfer of Roth IRA assets may also be made from one spouse’s (or former spouse’s) Roth IRA to another, provided the transfer is permitted in accordance with a court-approved divorce decree or a legal separation agreement.
There is no limit to the number of times an IRA holder may transfer assets between Roth IRAs.
Roth IRA to Roth IRA
An individual may make rollover contributions to his or her Roth IRA. A rollover is a tax-free movement of assets between retirement plans, but unlike a transfer, which is nonreportable, a rollover is reportable. The distribution is reported to the IRS and Roth IRA owner on IRS Form 1099-R, and the rollover contribution is reported on IRS Form 5498. An IRA owner may roll over only one distribution from a Roth IRA within a 12-month period.
A rollover contribution may originate from a distribution from the same Roth IRA or another Roth IRA. Rollover contributions must be made within 60 days after the Roth IRA owner receives the distributed assets.
Qualified Plans to Roth IRAs
Individuals can roll over eligible amounts from qualified plans, 403(b) and governmental 457(b) plans to Roth IRAs. These rollovers are reportable and any pretax amount is taxable. The rollover is reported on IRS Form 1099-R for the qualified plan and on IRS Form 5498 for the Roth IRA.
A conversion is a reportable movement of assets from a Traditional, SEP or SIMPLE IRA to a Roth IRA. SIMPLE IRA assets cannot be converted to a Roth IRA until two years after the employer first made a contribution to the individual’s SIMPLE IRA. (See the tutorial SIMPLE IRAs for details.)
The conversion is reported to the IRS and IRA owner on IRS Form 1099-R (for the Traditional IRA) and IRS Form 5498 (for the Roth IRA). There is no limit on the number of conversions an individual may complete within any period, and no income limit for conversion eligibility purposes.
An individual who converts Traditional, SEP or SIMPLE IRA assets to a Roth IRA may have that conversion nullified by recharacterizing the conversion. The individual may then later decide to convert the assets back again to a Roth IRA. The second conversion of these assets is a reconversion, which must not occur before the later date of these two following times:
- the beginning of the tax year following the taxable year in which the first conversion occurred
- 30 days after the recharacterization occurs
Any reconversion that occurs before the later of these two dates is treated by the IRS as a failed conversion and must be returned to the Traditional IRA by means of a recharacterization.
Tom converted his Traditional IRA to his Roth IRA in January 2015. Then, Tom recharacterized his conversion (back to his Traditional IRA) on December 1, 2015.
Tom may reconvert his Traditional IRA to his Roth IRA any time on or after January 1, 2016, for the following reasons:
- January 1, 2016, is the beginning of the year following the year he first converted his IRA assets.
- January 1, 2016, is later than 30 days after he recharacterized the conversion.
The following are examples of other dates on which Tom would be eligible to reconvert his Traditional IRA to his Roth IRA, as determined by the date he recharacterized the conversion:
|Date of Conversion||Date of Recharacterization||Earliest Date Eligible for Reconversion||Comments|
|January 31, 2015||June 30, 2015||January 1, 2016||This is later than 30 days after the recharacterization.|
|August 31, 2015||October 15, 2016||November 15, 2016||This is later than the first day of the year following the year the conversion occurred.|
|December 31, 2015||July 15, 2016||August 15, 2016||This is later than the first day of the year following the year the conversion occurred.|
A recharacterization is the act of treating an IRA contribution as one being made to another type of IRA, or, as discussed above, a recharacterization is a reversal of a conversion to a Roth IRA. An individual who makes a contribution to a Traditional IRA may later decide to treat this contribution as a contribution to a Roth IRA (or vice versa). The assets representing the contribution, along with any net income attributable (NIA) to the contribution are moved from the Traditional IRA to the Roth IRA.
Recharacterizations must be completed by the individual's tax-filing deadline (generally April 15 of the following year) for the year the contribution or conversion occurred. If, however, the individual either files a tax return by the tax-filing deadline or applies for a tax-filing extension by the tax-filing deadline, the deadline for the recharacterization is automatically extended for an additional six months (usually to October 15). (For more insight, check out Recharacterizing Your IRA Contribution Or Roth Conversion.)
Deducting IRA Contributions
Roth IRA contributions are not deductible; therefore, unlike a Traditional IRA contribution, a Roth IRA contribution is not affected by an individuals' active-participant status.
Regular Roth IRA contributions do not have to be reported on the individual's income tax return. However, the Roth IRA owner may be required to report Roth IRA conversions, recharacterizations and distributions on his or her tax return.
Permissible Investments in IRAs
One benefit of investing in a Roth IRA is that the investment options are many and varied. There are relatively few investments that are not permitted in a Roth IRA. The ability of the Roth IRA owner to choose the type of investment depends on the Roth IRA product and the financial institution. Some Roth IRAs may be limited to a preselected core group of investments or to a specific investment. For others Roth IRAs, the owner is free to choose the investments. These are commonly referred to as "self-directed Roth IRAs."
Investment in Collectibles
Roth IRAs cannot invest in collectibles, which include art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other tangible personal property. The exceptions are U.S. gold coins, silver coins minted by the Treasury Department, certain platinum, gold, silver, palladium and platinum bullion. Volume limitations apply. (For more insight, see IRA Assets And Alternative Investments.)
Some financial institutions place further restrictions on Roth IRA investments.
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