Roth Ira

The 109th Congress passed several tax measures that became laws of the land in 2006, making that year one of the most productive for several decades, in terms of impact on taxes. In the course of that year, three new tax laws were adopted, and these would have impact on 2006 Roth IRA contributions, conversions from traditional IRA, and other features.

It is well known that for a traditional IRA, you become liable for taxes when you start drawing distributions of your original direct contributions from your income; these were deducted from your taxable income at that time, so now you will have to pay the taxes.

For Roth IRA contributions, however, no taxes are due on distributions since the original contributions were not deductible. For as long as the distributions are qualified distributions, you don't pay any taxes. A distribution is considered a qualified distribution under Roth IRA if it is done when the individuals has reached at least age 59 ½ and when the Roth IRA has been in existence for at least 5 years.

Qualified distribution also applies to withdrawals in case of death or disability of the individual owning the IRA or for certain special purposes. If the distributions are not qualified distributions under Roth IRA, they will become part of the individual's gross income for the year. Note that only fund earnings that are made part of the distribution will be taxable. Distribution of direct contributions is tax-free.

The 2006 Roth IRA provisions in the Pension Protection Act of 2006 allows taxpayers to make qualified charitable distributions without being liable for taxes, if any would have been due under the previous provisions. The exemption from tax for qualified charitable distribution also applies to an IRA. This special provision limits the exclusion to $100,000 per year for each individual. This is applicable for tax years 2006 and 2007.

The Act defines a qualified charitable distribution under 2006 Roth IRA as a distribution that is donated directly by the Roth IRA trustee - not by the individual - to a charitable organization. If the distribution passes through the taxpayer first before being donated, the distribution would be subject to tax.

For those who want to do conversions to Roth IRAs, there is some relief from the Tax Increase Prevention Act. Prior to 2006 Roth IRA conversions from traditional IRAs were limited to those whose modified adjusted gross income (AGI) did not exceed $100,000 and the conversions were taxable.

With the new law, after 2006 Roth IRA conversions are now permitted even to taxpayers with modified AGIs are above $100,000 although the provision will become effective only in 2010. The new 2006 Roth IRA provisions also allow the taxes due on such conversions to be paid in two installments in 2011 and 2012 to ease the burden.

The 2006 Roth IRA contribution limits have also been slightly adjusted. There is a new Roth 401K version also authorized by the 2006 Roth IRA provisions. After 2006 Roth IRA has become accessible to more people, in the hope that they, too, will enjoy the benefits of Roth IRA.