Question

Chris and Kelly are married and file a joint return for 2017. Kelly does not work, so she is eligible for a spousal IRA. Their AGI is $135,000. Chris is an active participant in a qualified plan. A deductible contribution of $5,500 may be made for Kelly because the AGI is below the applicable phase-out range for her ($186,000-$196,000). Chris may not make a deductible contribution because the AGI is above the phase-out range for him ($99,000-$119,000). What are Chris' options as far as making an IRA contribution for 2017?

	a.	Chris may make a $5,500 Non-deductible contribution to a Traditional IRA or he may make a $5,500 Roth contribution because their AGI is below the Roth contribution phase-out. He could also contribute some to each, with $5,500 as the overall total contributed.
	b.	Chris may not make a contribution to a Traditional IRA. He may make a $5,500 Roth contribution because their AGI is below the Roth contribution phase-out.
	c.	Chris is not eligible to make a contribution to either a Traditional or a Roth IRA.
	d.	Chris may make a $5,500 Non-deductible contribution to a Traditional IRA. He is not eligible for a Roth because he is an active participant.

Cheri established her Roth IRA in 2011. She is 48 years old. She wants to withdraw the entire amount in the Roth. Will she be taxed on the withdrawal?

		a. No. Roth withdrawals are not taxable because the contributions were not deductible when made.
		b. There will be a tax and penalty on the withdrawn earnings in the account because Cheri is under age 59 1/2.
		c. There will be tax and penalty on the entire withdrawal.
		d. The entire withdrawal will be included in Cheri's gross income for the year because she is not 59 1/2. There will be a penalty on the earnings withdrawn.

Answer 1

1.Roth IRA is a special retirement account that you fund with post-tax. Once you have done this, all future withdrawals that follow Roth IRA regulations are tax free. There is no up-front tax deduction for Roth IRA contributions, as there is with a traditional IRA.

Thus option (d) Chris may make a $5,500 Non-deductible contribution to a Traditional IRA. He is not eligible for a Roth because he is an active participant, is the most plausible option.

(a) Chris may make a $5,500 Non-deductible contribution to a Traditional IRA or he may make a $5,500 Roth contribution because their AGI is below the Roth contribution phase-out. He could also contribute some to each, with $5,500 as the overall total contributed, is not possible since Roth Contribution are no upfront tax and thus phase out of income is not to be considered.

(b) Chris may not make a contribution to a Traditional IRA. He may make a $5,500 Roth contribution because their AGI is below the Roth contribution phase-out, again Roth contribution seeks no phase out of AGI.

(c) Not most likely

2.

Roth IRA Withdrawal Rules (quote from government website)

Quick Summary:

• If you are 59½ or over, you may withdraw as much as you want, as long as your Roth IRA has been open for at least 5 years.
• If you are under 59½, you may withdraw the exact amount of your Roth IRA contributions with no penalties.
• There are special exemptions for first-time home purchase and college expenses.

Here are five Roth IRA withdrawal rules you should know:

1) Contributions

Tax-free in/tax-free out. An investor can take out the exact amount of his or her Roth IRA contributions at any time, for any reason without having to pay any tax or penalty—with one big caveat. The earnings from your principal cannot normally be withdrawn prior to age 59½ without paying the 10% early withdrawal penalty. Earnings can generally be withdrawn without penalties after age 59½, provided you meet the five-year rule.

2) Roth IRA Five-Year Rule

Withdrawals from your Roth IRA will only be classified as qualified distributions if it has been at least five years since you first opened and contributed to your Roth IRA, regardless of your age when you opened it.

3) Qualified Versus Non-Qualified Distributions

Before making any Roth IRA plan withdrawals, know the difference between “qualified” and “non-qualified” distributions. Qualified distributions- A qualified distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

Non-qualified distributions- These are subject to taxation of earnings and a 10% additional tax unless an exception applies. For Roth IRAs, you can always remove post-tax penalty contributions (also known as “basis”) from your Roth IRA without penalty.

4) First Home Purchase Exception

There are other loopholes that enable you to take money out of a Roth IRA without fear of incurring a tax penalty. One is for a first home purchase, up to a $10,000 lifetime maximum amount, per individual IRA account. According to IRS rules, first home purchase assets can be withdrawn for the account holder, or for the account holder’s children or grandchildren.

5) College Expenses Exception

Penalty-free withdrawals from a Roth IRA for assets earmarked toward higher education expenses for the individual, the individual’s spouse, children, grandkids and great-grandkids.

In Cheri's case most possible scenario is (b) There will be a tax and penalty on the withdrawn earnings in the account because Cheri is under age 59 1/2 based on withdrawals rules stated above. Other options are incorrect.