Contribution Amounts
You can contribute to a Roth IRA up to the lesser of:

1.     $6,000 or

2.     100% of your earned income. The lesser of these amounts is subject to a further reduction or elimination depending upon your income level (see Contribution Phase-Out below).

a.     You can contribute up to the lesser of (1) $6,000 or (2) 100% of your earned income. The $6,000 per person annual contribution limit is a maximum that applies to the total contributions to both traditional and Roth IRAs. For example, you could contribute $3,000 to a Roth IRA and $3,000 to a traditional IRA, making a total of $6,000 in IRA contributions. However, you could not contribute $3,000 to one type and $3,500 to the other since that sum would be larger than the $6,000 annual limit.

b.     Married couples can contribute up to a total of $12,000 per year. If you’re married and only one of you is working (or has a high enough income), then the non-working/lower-earning spouse can also contribute up to $6,000, provided the combined contribution (e.g., $6,000 for each of you) is not larger than the earned income.

c.     Individuals don’t have to contribute every year. You decide which years you want to contribute to an IRA.

d.     If you are 50 years old or older this year, you’re allowed to contribute an additional $1,000 under the “catch-up” provision bringing the total contribution limit to $7,000.

Contribution Phase-Out
Single persons with a modified adjusted gross income of less than $125,000 may make the maximum contribution of $6,000.

Married couples filing jointly with a modified adjusted gross income of less than $198,000 may make the maximum contribution of $12,000. The contribution level of a married person filing separately (who lived at least part of the year with his or her spouse) is reduced as income goes between $0 and $12,000 and then it is eliminated completely (however, a married individual who has lived apart from his or her spouse for the entire taxable year and who files separately is treated as not being married and is under the single person rules described above).

Timing of Distributions
Unlike traditional IRAs, you do not have a mandatory distribution deadline with a Roth IRA. Where traditional IRAs require distributions to start no later than April 1 of the year after the year you reach age 70½, the absence of such a deadline allows a Roth IRA to continue to grow income tax free.

Income Taxes & Penalties
Under federal income tax law, there are five possible results for distributions from a Roth IRA:

1. Pay no income tax or penalty on the distributed earnings or contributions or

2. Pay no income tax or penalty on the distributed contributions or

3. Pay no income tax but pay a penalty on the distributed contributions or

4. Pay income tax, but no penalty, on the distributed earnings or

5. Pay income tax and a penalty on the distributed earnings

When you consider distributions from a Roth IRA, always keep these two categories in mind: contributions and earnings. As you’ll see below, the rules for distributing contributions and the rules for distributing earnings may be same or they can differ depending upon the circumstances.

For Distributions to be Income Tax & Penalty Free
A distribution of earnings and your contributions from your Roth IRA can be made free of any federal income tax and a penalty if:

1.     the distribution is made on or after your Roth IRA has been open for at least 5 taxable years and

2.     any one of the following apply:

a.     You are at least age 59½ or

b.     You are using the funds (up to $10,000) for a first-time home purchase or

c.     You are disabled or

d.     Your beneficiaries are receiving distributions after your death

The term “first-time home purchase” means you didn’t own part or all of a principal residence in the two-year period before buying the new house. This $10,000 amount is a lifetime limit and is not an annual limit.

The five-year rule has some twists and turns, too. A contribution is considered to have been made on the first day of the tax year to which it applies. So, for example, a contribution made by April 15, 2021 for your 2020 calendar year income tax return would be treated as a January 1, 2020 contribution.

Beneficiary Designations
Legal and tax advice is useful when determining how to complete beneficiary designations. Properly completed designations can help save estate (death) tax, avoid probate, allow better income tax opportunities and avoid creditor claims on retirement assets.

Extra care needs to be taken in naming trusts as a beneficiary of most retirement assets in case of a death. Sometimes, naming trusts as a beneficiary can trigger income tax sooner than it would otherwise be owed and reduce the amount ultimately shielded from death tax.

Note that many plans require the participant’s spouse to be the beneficiary, unless the spouse provides written permission for another beneficiary to be named.

Creditor Protection
Retirement plans and accounts may have special creditor protection under federal and/or state laws. Different types of plans and accounts may have varying degrees of protection. State protection rules may also vary from state to state.

If you convert from one type of plan to another (e.g., from a traditional IRA to a Roth IRA), you may be changing how much protection you have. This may be also be the case if you move to another new state where the new state rules are different.

Consulting with an attorney for guidance on the creditor protection issue may be helpful.

Estate & Death Taxes
Retirement assets are added to your other assets and may be subject to federal and/or state death (estate) tax. It depends upon the size of your overall estate and the estate planning done for you. Consult with your advisor about ways to defer or avoid estate tax.

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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.

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