3/26/2013

Google Glass- http://www.google.com/glass/start/what-it-does/

Roth IRA

Qualified Distributions - http://www.fool.com/money/allaboutiras/allaboutiras07.htm

Any qualified distribution from a Roth IRA is NOT included in gross income for individual tax purposes. Simple as that. In effect, a qualified distribution from a Roth IRA is tax-free... no taxes due on the principal... no taxes due on the earnings... no taxes due, period.

To be qualified, the distribution MUST be:

1. Made on or after the date you become age 59 1/2; OR
2. Made to your beneficiary, or to your estate, after you die; OR
3. Made to you after you become disabled within the definition of the IRS code; OR
4. Used to pay for qualified first-time homebuyer expenses.

But -- and this is a very big but -- even if one of the qualifications above is met, the distribution is STILL not qualified if it is made within a five-tax-year period. We'll see how to compute the five-tax-year holding period a bit later. Just know that five tax-years are NOT necessarily the same as five calendar years.

So, in effect, there are two sets of rules that must be met before a Roth IRA distribution becomes qualified, and therefore tax-free: The distribution rules and the five-tax-year rules. Unless both sets of rules are met, the distribution will NOT be qualified, and the earnings will be subject to tax, and possibly penalties. We'll discuss penalties in detail in the next article.

Penalties on Earnings from Contributions

Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an "early withdrawal penalty" of 10% on the amount of the distribution. Be very careful NOT to confuse the early withdrawal penalty with the taxes imposed on a non-qualified distribution (discussed in Part III). A non-qualified distribution imposes an ordinary income tax on the distribution, but the early withdrawal penalty will be imposed in addition to that tax.

Example #1

Jim, age 30, made a Roth IRA contribution of $2,000 in 1998. In 2005, Jim's Roth IRA has a balance of $3,500. Jim decides to close his Roth IRA in a non-qualified distribution that year. Since the distribution is non-qualified, Jim will owe taxes on his Roth earnings of $1,500, and will pay tax on this amount at his marginal tax rate. In addition, since the distribution took place before Jim reached age 59 1/2, and since Jim did not meet any of the exceptions, Jim will also be assessed a 10% early withdrawal penalty on the earnings. If we assume that Jim is in the 28% marginal tax bracket, he will pay $420 in tax on the earnings, and will pay a penalty in the amount of $150 on the early distribution. This is a very steep price to pay.

I have a company pension plan and contribute as much as I can to a 401(k) plan. Can I still make a full annual contribution to a Roth IRA?

You sure can, as long as your adjusted gross income (AGI) doesn't exceed the limits allowed for a Roth contribution for the year. Your participation in an employer-sponsored retirement plan has no effect on your ability to contribute to a Roth IRA. Therefore, if your AGI is less than $95, 000 (single filer) or $150,000 (joint filer), you may make a full contribution to a Roth IRA.

I'm retired and drawing Social Security. Can I contribute part of my Social Security benefits to a Roth IRA account?

Nope. Sorry. In order to make a Roth IRA contribution, you must have earned compensation. Earned compensation is generally income that you receive through work as payment for your labor in one form or another. It's reported to you on a W-2 form, or you file Schedule C (Business Income) with your normal tax return. Earned compensation generally does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains.

I intend to retire at age 50. When I do, I'll need income. Can I take money from my Roth IRA without paying any taxes or penalties?

Potentially, yes. Under the IRS ordering rules, you are allowed to remove your original contributions at any time without tax or penalty. In addition, after you have waited at least five tax years, you are able to withdraw your original conversion amounts without taxes or penalties. It's only when you get to the earnings generated by the original contributions and conversions that you will have a tax and/or penalty problem.

And, even if you DO determine that you'll have to break into the earnings prior to age 59 1/2, you may still avoid the penalty (but not necessarily the tax). If you remove the funds from your Roth IRA account using a distribution method that is part of a scheduled series of substantially equal periodic payments made over your life expectancy (or the joint life expectancy of you and your beneficiary), you may still be penalty-free.

For First-Time Home Buyers

It's not often that you can take money from your traditional IRA or from your earnings in a Roth IRA before age 59 1/2 and avoid the dreaded 10% early withdrawal penalty. But, surprisingly enough, this is one of the tax benefits enacted as part of the 1997 Taxpayer Relief Act to help people become homeowners.

Now the law allows individuals to receive distributions from their traditional IRAs to pay up to $10,000 of first-time homebuyer expenses without incurring the 10% early withdrawal penalty that usually applies to withdrawals from a traditional IRA before age 59 1/2. But, even though the penalty is waived, you will still be required to pay taxes (as applicable) on the traditional IRA withdrawal itself.

Harvest Tax Losses Inside A Roth IRA - http://www.rothira.com/blog/can-you-harvest-tax-losses-inside-a-roth-ira

What Does It Mean To Harvest Tax Losses?

With traditional taxable investments, you can offset your losses on your current year’s tax return with any capital gains that you earn. This can dramatically lower the amount of tax you pay on your capital gains. For example, if you own shares in a company’s common stock that have tanked along with the market giving you a paper loss of $3,000 for instance, you can sell those securities and use that loss to offset any profits in other investments that you would earn during that year. That loss could essentially wipe out any other $3,000 taxable gain from other investments in the Internal Revenue Service’s (IRS) eyes. Remember though that you actually have to sell the investments in question and actually realize both the loss and the capital gains to harvest tax losses this way. If you don't sell any investments that are capital gains, you can still harvest your losses for tax purposes. You can also simply accept a $3,000 loss and have no capital gains to offset the loss against. In this case you simply deduct the loss on your taxes.

Does Harvesting Tax Loss Apply To Roth IRAs?

Because a Roth IRA allows investors to withdraw their investments, profits, interest, dividends, and capital gains tax-free in retirement, losses occurring in a Roth IRA do not quality for tax harvesting in the traditional sense. There have to be tax losses for you to be able to benefit from the tax harvesting rules. One way that you may be able to still claim tax harvesting on your tax losses would be to undo a Roth IRA conversation. Traditional IRA investors have the option to convert their Traditional IRAs into a Roth IRA, and more people have been choosing this option with recent changes to tax laws that did away with previous income limits. With a conversion, you would pay federal income taxes at your current rate based on the amount of your conversion. This can be a great tax advantage if you are moving from a lower tax bracket to ultimately a higher tax bracket when you will withdraw the money during your retirement. You pay the taxes at that moment based on what your investment is worth at that time. If your new Roth IRA investment sinks to a very low account balance, reverting back to a Traditional IRA can provide you with a refund of the taxes that you originally paid. This is called a recharacterization of  your contribution. Of course, eventually you will owe taxes on the amount of money your withdraw from a Traditional IRA, but undoing a Roth IRA conversation may be a way for you to go back and harvest some of those tax losses. A Roth IRA’s tax-free withdraws make tax harvesting a very difficult proposition even if your account balance has declined quite considerably. One way that you may be able to participate in loss harvesting is to undo a Roth IRA conversion if you have converted a Traditional IRA to a Roth IRA.

 

Member of Household or Relationship Test 

Note that:

• A person is still considered to live with the taxpayer as a member of the household during periods when that person, or the taxpayer, is temporarily absent due to special circumstances such as illness, education, business, vacation, military service, or placement in a nursing home.
• Cousins can meet the relationship test for qualifying relative only if they live with the taxpayer for the entire year.
• Qualifying relatives can be unrelated, as long as they lived with the taxpayer all year.