Top 10 Roth IRA Questions:Underpayment Penalties, How AGI Changes Upon Conversion,

Early IRA Withdrawal Rules before 59, AGI Limits for Contributions, Taxes Upon IRA Conversions

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Top 10 Roth IRA Questions:6-10

Question #6:

Due to a Roth IRA conversion, I may have a very large amount to pay in taxes next April. Can I avoid the underpayment penalties that are related to estimated taxes?

Unfortunately, there is no way to become exempt from the underpayment penalty. It doesn't matter that the amount is based on a conversion. There are some exceptions to the underpayment rule, so it is best to review the rules and regulations revolving around underpayment.

Question #7:

After converting from a regular IRA to a Roth, will that income be applied to my adjusted gross income for that year?

Any income that you report for a traditional IRA conversion to a Roth account will most definitely have an affect on your adjusted gross income. The exception to this applies to direct contributions to the Roth. If you meet the limitation rules and are allowed to convert to a Roth prior to the conversion income being taken into consideration, the income from the Roth will not make you ineligible due to an increased AGI. However, all tax provisions that currently use AGI as a guideline, such as medical expenses, miscellaneous deductions and passive loss limitations, will be greatly affected.

Make sure to take your AGI into consideration before making the decision to convert to a Roth. A significant change in your AGI can cause a lot of problems after the conversion has been performed. Always be sure to abide by Roth IRA rules to avoid penalties.

Question #8:

My intention is to retire at age 50. When that occurs, I will need additional income. Is there a way I can take money from my Roth account without having to pay penalties or taxes?

Based on Roth IRA rules, the answer is yes. You are allowed to withdraw any original contributions without having to pay taxes or penalty fees. Also, if you have had the account for at least five years, you can take out any original amounts that were converted without taxes or IRA penalties. The only time you may encounter a problem is when you begin to withdraw any earnings that were generated by the contributions and conversions. You will then have to pay taxes and penalties on the amount being withdrawn. Be sure to know and understand IRA withdrawal rules to avoid possible penalties based on improper withdrawals.

It is possible to avoid penalties if you begin withdrawing from your Roth IRA before you reach 59 1/2. However, you may not be so lucky as to avoid the taxes. If you have a scheduled distribution and begin removing funds before 59 1/2, you will be able to obtain the funds without penalties.

Question #9:

I have heard that the AGI limitation is $100,000, but I have also heard that the limit is higher. What is the limitation for a Roth?

The limits will vary depending on whether the IRA is a conversion. If there is a conversion from a traditional IRA account to a Roth, the AGI limitation is $100,000, unless you are married and file separately. Separated couples cannot make a conversion, no matter what their AGI is. The conversion cannot be made until the separated couple has lived apart for more than one year.

The rules differ when referring to contributions that are made to a Roth IRA plan. With contributions, the AGI limitations are based on your tax filing status. If you file single and have an AGI of less than $116,000 (on your 2007 tax forms), then you are eligible for Roth IRA contributions. Married couples can have up to $166,000 AGI.

A Roth IRA is a great tool to prepare for retirement. Make sure you familiarize yourself with all rules, regulations and penalties that are involved. It is better to take the time to review this information now than to get hit with unforeseen taxes and IRA penalties in the future.

Question #10:

Upon converting a traditional IRA to a Roth, are taxes due all at once?

Whenever you make a conversion to a Roth, all due taxes must be paid at once. When Roth IRAs were first out, there were other rules that stated you were allowed to spread out the conversion income. That rule has been revised and is no longer an option. All taxes must be paid upon the time of the conversion. Congress has most recently passed a law that allows for the taxes related to a conversion in 2009 and 2010 to be paid in 2011 and 2012. See your financial advisor or call Estate Street Partners to implement this.

Read part one of this two-part series on the top 10 Roth IRA questions addressing: contributions made with social security money, adding annual contributions into an IRA account that has been converted, contributions made by your 16-year old teenager, contributions for seniors over 73.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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