Traditional and Roth IRAs

An individual retirement account (IRA) is a personal savings plan that may provide tax advantages for setting aside money for retirement. Contributions made to a traditional IRA may be used as a tax deduction dependent upon:

• Active participation in an employer-sponsored retirement plan at any time during the year by the account owner or their spouse.
• The individual’s tax filing status.
• The individual's modified adjusted gross income.

As a general rule, most traditional IRA distributions are subject to ordinary income tax in the year you receive the distribution. Distributions taken prior to the owner reaching age 59 ½ are subject to an additional 10% tax penalty, also known as a premature penalty. The following are some exceptions to the 10% penalty:

• Disability
• Series of substantially equal periodic payments
• Medical insurance premiums while unemployed
• First home purchase up to $10,000
• Higher education expenses
• IRS levy
• Qualified reservist distribution
• Birth or adoption of a child
• Death
• Disaster recovery
• Domestic victim distribution
• Terminal illness
• Unreimbursed medial expenses that are more than 7.5% of your AGI 

Yes, 401(k) balances can be rolled over into an IRA. Pretax balances are rolled over into a traditional IRA, and Roth 401(k) balances, if applicable, are rolled over into a Roth IRA. Rollovers can occur in one of two ways: 

1. A direct rollover is a trustee-to-trustee transfer between a qualified plan and an IRA for the same shareholder. 
   o   The shareholder must have attained a distributable event, such as retirement, severance of employment, disability, or death.
   o   The distributing plan will report the direct rollover distribution on IRS Form 1099-R, and the receiving IRA custodian will report the rollover contribution on IRS Form 5498.

2. An indirect rollover is a tax-free reinvestment (contribution) of a distribution from an eligible retirement plan into another eligible retirement plan within 60 days.
   o   Indirect rollovers are reportable. The shareholder will receive IRS Form 1099-R from the distributing plan and IRS Form 5498 for the rollover contribution from the receiving IRA custodian.
   o   Invesco policy: Invesco doesn’t police acceptance of the 60-day period for indirect rollover contributions. However, if Invesco receives an Invesco Self-Certification for Late Rollover Contributions Form or IRS Model Letter, along with a rollover contribution, then we will report the rollover contribution with a self-certifying waiver of the 60-day requirement on IRS Form 5498.

A Roth IRA is a personal savings plan where regular nondeductible contributions accrue tax-free earnings. Contribution amounts may be withdrawn tax-free and penalty-free at any time. Additionally, any earnings made are not subject to federal income tax as long as the account has been maintained for at least five years and qualifies for a distributable event, such as age 59 ½, disability, death, or first-time home buyer expenses.

Roth IRA owners can take out Roth contributions (Roth basis) at any time without paying taxes or penalties. As an added benefit, Roth earnings are not subject to federal income tax if certain requirements are met. To withdraw earnings from a Roth IRA without owing taxes or penalties, the owner must be over 59 ½ and the account also must be at least five years old. This stipulation is known as the five-year rule. Additionally, unlike other sources of retirement savings, Roth IRAs don't have minimum distribution requirements and can be part of an estate planning strategy.

Return of Roth contributions (return of basis) is generally tax-free and penalty-free regardless of age or holding period. Since contributions to a Roth IRA are nondeductible, the dollar amount of the contributions (basis) may be withdrawn at any time without taxes or penalties. Withdrawal of conversion amounts, however, may be subject to a 10% recapture tax if withdrawn before the five-year recapture period is over.

In order to contribute to a Roth IRA, the owner must meet two requirements:

1. The depositor (or their spouse if filing a joint tax return) received taxable compensation during the year.
2. The depositor must meet certain modified AGI requirements as detailed under Publication 590A, Appendix A and B, on IRS.gov. 

As a general rule, contributed Roth IRA amounts may be withdrawn tax-free and penalty-free at any time because these amounts have already been taxed. At age 59 ½, investment earnings can be withdrawn without taxes or penalties if the Roth IRA account has been open for a minimum of five years. 

Earnings distributions prior to age 59 ½ and the five-year holding period are subject to federal taxes and penalties. However, there are penalty exceptions. some are:

• Disability
• Series of substantially equal periodic payments
• Medical insurance premiums while unemployed
• First home purchase up to $10,000
• Higher education expenses
• IRS levy
• Qualified reservist distribution
• Birth or adoption of a child
• Death
• Disaster recovery
• Domestic victim distribution
• Unreimbursed medial expenses that are more than 7.5% of your AGI 
• Terminal illness