by Edward A. Zurndorfer-
Although it is past Dec. 31, 2018, federal employees and, if married their spouses, have until April 15, 2019 (the deadline for filing 2018 income tax returns) to make their 2018 Roth Individual Retirement Arrangement (IRA) contributions. Even if an individual has filed his or her 2018 federal income return, the individual and spouse can still make his or her 2018 Roth IRA contribution. This column discusses Roth IRA contribution and distribution rules and why Roth IRA can play an important part of federal employee’s future retirement.
Contributions to Roth IRAs are always nondeductible. For 2018, the combined limit for contributions to traditional and to Roth IRAs is the lesser of $5,500 (plus $1,000 if age 50 or older as of Dec. 31, 2018) or compensation.
Like traditional IRAs, there is a requirement for an individual (or the individual’s spouse) to have some type of compensation in order to contribute to a Roth IRA. Compensation includes wages or salary, commissions, self-employment income, or nontaxable combat pay. Compensation does not include income from investments, pensions or annuities, Social Security benefits, or rental income.
Unlike traditional IRAs, which have an age limit of age 70 to make a contribution, there is no age limitation for contributing to a Roth IRA. The only limitation for contributing to a Roth IRA is one’s modified adjusted gross income (MAGI), as presented in the following table:
2018 Roth IRA Contribution “Phase-Out”
|Filing Status||Modified AGI1 “Phase-Out”|
|Married Filing Joint or Qualified Widow/Widower||$189,000 – $199,000|
|Single or Head of Household||$120,000 – $135,000|
|Married Filing Separate||$0 – $10,000|
1 Modified AGI equals AGI less Roth IRA conversion income less income from a rollover from a qualified retirement plan to a Roth IRA, plus foreign earned income exclusion plus foreign housing exclusion or deduction, plus excluded US savings bond interest, plus student loan interest deduction.
At this time, individuals should know what their 2018 MAGIs are. The IRS has a worksheet in Publication 590-A (Individual Retirement Arrangements – Contributions) that allows individuals to compute the amount of their allowable Roth IRA for 2018 based on their MAGI. The worksheet is reproduced below.
Roth IRA – Reduced Contribution Worksheet (2018)
|1. Enter MAGI1 for Roth IRA purposes ………………………………………..$ ________
2. Enter: $189,000 MFJ or QW or $120,000 Single or HOH ………..$ ________
3. Subtract line 2 from line 1 ……………………………………………………..$ ________
4. Enter: $10,000 MFJ, QW or MFS, $15,000 Single or HOH …….$ ________
5. Divide line 3 by line 4 and round the decimal to three places.
Do not enter more than 1.000 ……………………………………………….$ ________
6. Enter the lesser of $5,500 ($6,500 if age 50 or older) or
taxable compensation …………………………………………………………$ ________
7. Multiply line 5 by line 6 …………………………………………………….$ ________
8. Subtract line 7 from line 6. Round up to nearest $10. If less than $200, enter $200
9. Enter contributions for the year to other IRAs ………………….$________
10. Subtract line 9 from line 6 ……………………………………………$ ________
11. Reduced Roth IRA contribution limit. Lesser of line 8 or 10
1 Modified AGI (MAGI) equals AGI less Roth IRA conversion income less income from a rollover from a qualified retirement plan to a Roth IRA, plus foreign earned income exclusion plus foreign housing exclusion or deduction, plus excluded US savings bond interest, plus student loan interest deduction.
Some traditional IRA rules apply to Roth IRAs
Several rules that apply to traditional IRAs also apply to Roth IRAs, including:
- Contributions may be made up to the original due date of an individual’s tax return with no extensions. This means that the deadline for making contributions to a Roth IRA for tax year 2018 is April 15, 2019, the due date for filing 2018 individual tax returns. In making their Roth IRA contributions for 2018 before the April 15, 2019 contribution deadline, employees should make sure that they tell their Roth IRA custodians that the contributions are for 2018, not for 2019.
- There is a 6 percent IRS penalty on excess contributions
Distributions from Roth IRAs
As mentioned previously, contributions to Roth IRAs are made with after-taxed dollars and therefore are always nondeductible. The contributions made to a Roth IRA can be withdrawn at any time income and penalty tax-free. The accrued earnings in a Roth IRA may be withdrawn income and penalty tax –free if the distribution is a qualified distribution. A Roth IRA distribution is qualified if the distribution is made after a five-year holding period. The five-year holding period begins on the first day of the first year for which Roth IRA contributions were made and one of the following applies: (1) The Roth IRA owner is age 59.5 or older; (2) The distribution is due to death or disability; or (3) The distribution is eligible for the first-time homebuyer exception to the 10 percent penalty tax on early distributions.
Why Roth IRAs can be an important part of a federal employee’s future retirement
Roth IRAs can play an important part in a federal employee’s future retirement for several reasons. First, all qualified Roth IRA distributions are tax-free. This means that unlike their other retirement income (CSRS or FERS annuities, the traditional Thrift Savings Plan (TSP), Social Security and military retirement pay, federal annuitants need not worry about paying federal and state income taxes on qualified Roth IRA distributions. Related to that, because qualified Roth IRA distributions are not included in income, those annuitants who are enrolled in Medicare Part B (medical insurance) (and whose monthly premiums depend each year on the annuitant’s adjusted gross income) need not be concerned about paying more for Medicare Part B as a result of Roth IRA distributions. Second, a Roth IRA is the only type of retirement that is not subject to required minimum distributions (RMDs) when the Roth IRA owner becomes age 70. It is reassuring that a Roth IRA owner can – if he or she needs to – make a withdrawal and not pay any income taxes as a result. But if the Roth IRA never makes a withdrawal and dies, a beneficiary will also benefit from tax-free withdrawals. Those employees who are not eligible to a Roth IRA because of high income are still eligible to contribute to the Roth TSP (which does not have any income limitations). After retiring from federal service, an employee can directly transfer his or her Roth TSP account to a “rollover” Roth IRA with no income limitations. This transfer could be extremely beneficial to the Roth TSP owner if the transfer is performed before the Roth TSP owner becomes age 70. This is because the Roth TSP is subject to RMD.
*** Written by Edward A. Zurndorfer, who is a Certified Financial Planner™, Chartered Financial Consultant, Chartered Life Underwriter, Certified Employee Benefits Specialist and Enrolled Agent in Silver Spring, MD. He is the owner of EZ Accounting and Financial Services, an accounting, tax preparation, and financial planning firm also located in Silver Spring, MD. He is a seminar speaker at Federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. He is also a weekly columnist for MyFederalRetirement.com. Raymond James is not affiliated with and does not endorse the opinions or services of FEDZONE or Edward A. Zurndorfer or any of the above listed organizations. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer and/or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Telephone number, 301-681-1652.