There are special rules that do not apply to other types of retirement accounts.You can make contributions to the account up to a certain limit once you open a Roth IRA.If you want to take money out of your IRA, you need to understand the tax consequences.If you would like to withdraw funds from your IRA, you have to calculate your potential tax liability.
Step 1: You can open a IRA.
You can open a IRA at any time.The account must have the word "Roth" in it.Ask your financial advisers about your options if you want to open one.Look for IRAs that don't have opening or maintenance fees.Look for account options that include minimal trading fees, which are assessed when your money is invested in different markets.You can find the best deal by shopping around.Roth IRAs can help you save for retirement, minimize tax liability, and the money contributed can be used at any time.You can have more flexibility in your retirement accounts.You can make contributions at any age, and you don't have to take distributions.
Step 2: Determine if you are eligible to contribute to the IRA.
To contribute to a IRA, you must have an income and a modified adjusted gross income that is below a certain threshold.Taxable compensation includes wages, salaries, tips, professional fees, bonuses, commissions, and self-employment income.To calculate your MAGI, you need to take your adjusted gross income from your tax forms and deduct student loan interest and higher education expenses.If you are married filing separately and you did not live with your spouse at any time during the year, you must contribute less than $193,000.If your MAGI is over the limits set out by the IRS, you can't contribute to a IRA at all.The IRS website has the most up-to-date information on eligibility and contribution limits for IRAs.Raising the limits on income and contribution can be done to meet cost of living increases.The information can be found on the IRS website.
Step 3: How much can you give?
You can only contribute a limited amount if you are eligible.If you are over 50 years old, you can contribute the lesser of $5,500 or your total compensation in one year.Your contribution limit will be gradually reduced if your MAGI is over a certain level.You can contribute the full amount if you are married and your MAGI is less than $183,000.Your contribution limits are reduced if your MAGI is less than $193,000.You can contribute the full amount if you are married and filing separately.Your contribution limits are reduced if your MAGI is less than $10,000.You can contribute the full amount if you are single and your MAGI is less than $116,000.Your contribution limits are reduced if your MAGI is less than $131,000.The IRS has a formula for reducing the contribution limit.The formula is based on how you file taxes and IRA contributions.Assume you are a 45 year old single adult with taxable compensation of $117,000.It is also $117,000.You can make the maximum allowable contribution to your IRA.Your base contribution limit is $5,500 because you have not contributed to any other traditional IRAs.Your reduced contribution limit will be $5,140, due to your MAGI and formula.
Step 4: Don't contribute too much.
Excess contributions will be subject to an excise tax if they are more than your allowable limit.The excise tax can be avoided if you withdraw excess contributions from your IRA.For this to count, you have to withdraw earnings from excess contributions.If the earnings distribution is not qualified, you may have to pay another tax.Don't contribute more than you are allowed due to the complicated tax issues.
Step 5: Understand how contributions are taxed.
Contributions to your IRA are not taxed.Your contributions will always come from post-tax income, because any amount you contribute comes out of your taxable compensation.
Step 6: Whenever possible, make qualified distributions.
A number of distributions are tax free, which is one of the most attractive characteristics of a Roth IRA.There are limits to that rule.A qualified distribution is the first type of distribution that is not taxed.To have a qualified distribution, it must have been at least five years since you opened the IRA.You must be at least 59.5 years old when you make the distribution, you must use it to buy or rebuild your first home, or you have to be dead, if you do not meet any of the other conditions.
Step 7: IRS Form 8606 can be found.
You will need IRS Form 8606 to calculate the tax part of your IRA distributions."Nondeductible IRAs" is the title of this form.Part III deals with distributions from IRAs.Put together instructions.Each IRS form has instructions to help you fill it out.The instructions on IRS Form 8606 should be followed in detail.
Step 8: In line 19 you can enter your total distributions.
You should include qualified first-time homebuyer distributions as well.Rollover distributions, returns of contributions, re-characterizations, and other distributions are not included.Assume you made $30,000 in non-qualified distributions from your IRA.In line 19 enter this number.
Step 9: First-time homebuyers expenses can be entered in line 20.
If you made a contribution to your IRA between 1998 and 2010 you should enter the amount of qualified expenses.These expenses can't go over $10,000.If you purchased your first home last year, you should have qualified expenses of $6,000.Line 20 of IRS Form 8606 is where you would enter that number.
Step 10: Put line 20 in line 21 by subtracting line 19 from it.
Put zero if the amount is zero or less.If line 19 was $30,000 and line 20 was $6,000, your line 21 would equal $24,000.
Step 11: You can enter your basis in line 22.
The amount of your contributions adjusted for re-characterizations will be equal to this line.You can use a specific IRS worksheet to help calculate this amount.The instructions to Form 8606 show you how to increase or decrease your value in line 22.If you have used the instructions and the worksheet, you can calculate your basis to be $10,000.You can enter this number on line 22.
Step 12: Place line 22 in line 23 by subtracting line 21.
If this number is more than zero, you will be subject to an additional 10% tax.If this number is less than zero, you don't have to pay taxes on non-qualified distributions.You will not be taxed for withdrawing your contributions.You won't be taxed on the amount of qualified distributions you make.Your line 23 would be equal to $14,000 if your line 21 was equivalent to $24,000.
Step 13: You have to calculate your federal tax liability for non-qualified distributions.
You are taxed 10% for these distributions.You can use the total from line 23 to calculate your tax liability.If line 23 is worth $14,000, you would divide it by 10.The tax liability for making non-qualified distributions would be $1,400.
Step 14: How much have you contributed?
You can check your IRA online, by phone, or by looking at the last statement you received.Contributions, earnings, and distributions are what most statements break down into.The amount contributed won't be the full balance, so make sure you get the right number.
Step 15: You can call your broker or financial advisor.
There is a different process for withdrawing money from each financial institution.If you have a financial advisor, you should let him or her know if you want to take money out of your IRA.If you don't have a contact person, you can talk to someone at the bank or the broker about your account.
Step 16: Pick the amount of money you would like to withdraw.
If you want to take out all the funds you have contributed, think about what you need the money for.You can't immediately replace the money you take out due to yearly contribution limits.Take out $10,000 from your IRA.It will take at least two years to replenish your IRA if you have a yearly contribution limit of $5,500.
Step 17: Tell the financial institution how to pay you.
Let the bank know how much you will be taking out and how you would like to receive the funds once you have worked out your budget.Some banks will give you a check and others will direct deposit the money into another account.Ask when it will be available to you.
Step 18: Records and documents should be kept for tax purposes.
You don't have to pay taxes or penalties if you withdraw your contributions from a IRA.If there are errors during tax time, keep receipts, records, and correspondence from this transaction.