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2.   Roth IRAs

Reminders

Deemed IRAs. For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. An employee's account can be treated as a traditional IRA or a Roth IRA.For this purpose, a “qualified employer plan” includes:

  • A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan),

  • A qualified employee annuity plan (section 403(a) plan),

  • A tax-sheltered annuity plan (section 403(b) plan), and

  • A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.

Designated Roth accounts. Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. Designated Roth accounts are not IRAs and should not be confused with Roth IRAs. Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. A contribution to one does not impact your eligibility to contribute to the other. See Pub. 575, for more information on designated Roth accounts.

Introduction

Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA.

Contributions not reported.   You do not report Roth IRA contributions on your return.

What Is a Roth IRA?

A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). It can be either an account or an annuity. Individual retirement accounts and annuities are described in How Can a Traditional IRA Be Opened? in chapter 1 of Pub. 590-A.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.

Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.

Traditional IRA.   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. Traditional IRAs are discussed in chapter 1.

Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions , later.

Basis of distributed property.   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution.

Withdrawals of contributions by due date.   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.

What Are Qualified Distributions?

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

  2. The payment or distribution is:

    1. Made on or after the date you reach age 59½,

    2. Made because you are disabled (defined earlier),

    3. Made to a beneficiary or to your estate after your death, or

    4. One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

Additional Tax on Early Distributions

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

Distributions of conversion and certain rollover contributions within 5-year period.   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.

  The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions? , earlier.

  For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2016, and makes a regular contribution for 2015 on the same date, the 5-year period for the conversion begins January 1, 2016, while the 5-year period for the regular contribution begins on January 1, 2015.

  Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.

  You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions.   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions.   You may not have to pay the 10% additional tax in the following situations.
  • You have reached age 59½.

  • You are totally and permanently disabled.

  • You are the beneficiary of a deceased IRA owner.

  • You use the distribution to buy, build, or rebuild a first home.

  • The distributions are part of a series of substantially equal payments.

  • You have unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1952) of your adjusted gross income (defined earlier) for the year.

  • You are paying medical insurance premiums during a period of unemployment.

  • The distributions are not more than your qualified higher education expenses.

  • The distribution is due to an IRS levy of the qualified plan.

  • The distribution is a qualified reservist distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions .

Figure 2-1. Is the Distribution from Your Roth IRA a Qualified Distribution?
Please click here for the text description of the image.

Figure 2-1. Is the Distribution from Your Roth IRA a Qualified Distribution?

Ordering Rules for Distributions

If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed under What if You Contribute Too Much? in chapter 2 of Pub. 590-A). Order the distributions as follows.

  1. Regular contributions.

  2. Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:

    1. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the

    2. Nontaxable portion.

  3. Earnings on contributions.

Disregard rollover contributions from other Roth IRAs for this purpose.

Aggregation (grouping and adding) rules.   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows.
  • Add all distributions from all your Roth IRAs during the year together.

  • Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. Add this total to the total undistributed regular contributions made in prior years.

  • Add all conversion and rollover contributions made during the year together. For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2016 and the conversion or rollover contribution is made in 2017, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2017.

Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA.

  Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose.

Example.

On October 15, 2012, Justin converted all $80,000 in his traditional IRA to his Roth IRA. His Forms 8606 from prior years show that $20,000 of the amount converted is his basis.

Justin included $60,000 ($80,000 − $20,000) in his gross income.

On February 23, 2016, Justin made a regular contribution of $5,000 to a Roth IRA. On November 8, 2016, at age 60, Justin took a $7,000 distribution from his Roth IRA.

The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income.

The next $2,000 of the distribution is not includible in income because it was included previously.

Figuring your recapture amount.   If you had an early distribution from your Roth IRAs in 2016, you must allocate the early distribution by using the Recapture Amount—Allocation Chart, later.

Recapture Amount—Allocation Chart

Enter the amount from your 2016 Form 8606, line 19  
Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. 
 
You will now allocate the amount you entered above (2016 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. Note. Once you have allocated the full amount from your 2016 Form 8606, line 19, STOP. See the Example , earlier.
Tax Year Your Form
2016 Form 8606, line 20   Form 8606, line 22  
1998 Form 8606, line 16   Form 8606, line 15  
1999 Form 8606, line 16   Form 8606, line 15  
2000 Form 8606, line 16   Form 8606, line 15  
2001 Form 8606, line 18   Form 8606, line 17  
2002 Form 8606, line 18   Form 8606, line 17  
2003 Form 8606, line 18   Form 8606, line 17  
2004 Form 8606, line 18   Form 8606, line 17  
2005 Form 8606, line 18   Form 8606, line 17  
2006 Form 8606, line 18   Form 8606, line 17  
2007 Form 8606, line 18   Form 8606, line 17  
2008 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2009 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2010 Form 8606, lines 18 and 23*   Form 8606, lines 17 and 22**  
2011 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2012 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2013 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2014 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2015 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2016 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2016 Form 8606, line 25      
*Only include those amounts rolled over to a Roth IRA. 
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA.
Amount to include on Form 5329, line 1.   Include on line 1 of your 2016 Form 5329 the following four amounts from the Recapture Amount—Allocation Chart that you filled out.
  • The amount you allocated to line 20 of your 2016 Form 8606.

  • The amount(s) allocated to your 2012 through 2016 Forms 8606, line 18.

  • The amount(s) allocated to your 2012, 2013, 2014, 2015, and 2016 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b.

  • The amount from your 2016 Form 8606, line 25.

  Also, include any amount you allocated to line 20 of your 2016 Form 8606 on your 2016 Form 5329, line 2, and enter exception number 09.

Example.

Ishmael, age 32, opened a Roth IRA in 2000. He made the following transactions into his Roth IRA.

  • In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. He entered $10,000 on line 18 of Form 8606.

  • In 2012, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. He used a 2012 Form 1040 to file his taxes. He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2012 Form 1099-R. Box 5 of his 2012 Form 1099-R reported $0 since he did not make any after-tax contributions to the qualified retirement plan. He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2012.

The total balance in his Roth IRA as of January 1, 2016 was $105,000 ($50,000 in contributions from 2000 through 2015 + $10,000 from the 2005 conversion + $20,000 from the 2012 rollover + $25,000 from earnings). He has not taken any early distribution from his Roth IRA before 2016. In 2016, he made the maximum contribution of $5,500 to his Roth IRA.

In August of 2016, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. See his filled out Illustrated Recapture Amount—Allocation Chart, later, to see how he allocated the amounts from the above transactions. Based on his allocation, he would enter $20,000 on his 2016 Form 5329, line 1 (see Amount to include on Form 5329, line 1 , earlier). He should also report $10,000 on his 2016 Form 5329, line 2, and enter exception 09 since that amount is not subject to the 10% additional tax on early distributions.

Illustrated Recapture Amount—Allocation Chart

Enter the amount from your 2016 Form 8606, line 19 $85,500
Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. 
 
You will now allocate the amount you entered above (2016 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. Note. Once you have allocated the full amount from your 2016 Form 8606, line 19, STOP. See the Example , earlier.
Tax Year Your Form
2016 Form 8606, line 20 $10,000 Form 8606, line 22 $55,500
1998 Form 8606, line 16   Form 8606, line 15  
1999 Form 8606, line 16   Form 8606, line 15  
2000 Form 8606, line 16   Form 8606, line 15  
2001 Form 8606, line 18   Form 8606, line 17  
2002 Form 8606, line 18   Form 8606, line 17  
2003 Form 8606, line 18   Form 8606, line 17  
2004 Form 8606, line 18   Form 8606, line 17  
2005 Form 8606, line 18 $10,000 Form 8606, line 17 $-0-
2006 Form 8606, line 18   Form 8606, line 17  
2007 Form 8606, line 18   Form 8606, line 17  
2008 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2009 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2010 Form 8606, lines 18 and 23*   Form 8606, lines 17 and 22**  
2011 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2012 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
$10,000 Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2013 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2014 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2015 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2016 Form 8606, line 18  
and  
Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*
  Form 8606, line 17  
and  
Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**
 
2016 Form 8606, line 25      
*Only include those amounts rolled over to a Roth IRA. 
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA.

How Do You Figure the Taxable Part?

To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III.

Must You Withdraw or Use Assets?

You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death .

Minimum distributions.   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. See Distributions to beneficiaries , later.

Recognizing Losses on Investments

If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis.

Your basis is the total amount of contributions in your Roth IRAs.

You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.

Distributions After Owner's Death

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can You Withdraw or Use Assets? in chapter 1.

Distributions to beneficiaries.   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1.

  If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.

  If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own.

Combining with other Roth IRAs.   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either:
  • Inherited the other Roth IRA from the same decedent, or

  • Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA.

Distributions that are not qualified distributions.   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive.

  If the owner of a Roth IRA dies before the end of:
  • The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or

  • The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA,

each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable?

Example.

When Ms. Hibbard died in 2016, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2012, and earnings of $2,000. No distributions had been made from her IRA. She had no basis in the conversion contribution in 2012.

When she established this Roth IRA (her first) in 2012, she named each of her four children as equal beneficiaries. Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings.

In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2016. The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner.

If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion.


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