Publication 590 (2002), Individual Retirement Arrangements (IRAs)

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Publication 590
Individual Retirement Arrangements (IRAs)

For use in preparing 2002 Returns

2. Roth IRAs

Important Changes for 2002

Increased Roth IRA contribution limit. If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2002, generally is the lesser of :

$3,000 (up from $2,000), or
Your taxable compensation.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced.

If you are 50 years of age or older in 2002 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2002 generally is the lesser of:

$3,500 (up from $2,000), or
Your taxable compensation.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? under Can I Contribute to a Roth IRA? in this chapter.

Contributions to both traditional and Roth IRAs for the same year. If contributions are made on your behalf to both a Roth IRA and a traditional IRA, your contribution limit for 2002 is the lesser of:

$3,000 ($3,500 if you are 50 years of age or older in 2002) (up from $2,000) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or
Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

Credit for IRA contributions. For tax years beginning after 2001, if you are an eligible individual, you may be able to claim a credit for a percentage of your qualified retirement savings contributions, such as contributions to your Roth IRA. To be eligible, you must be at least 18 years old as of the end of the year, and you cannot be a student or an individual for whom someone else claims a personal exemption. Also, your adjusted gross income (AGI) must be below a certain amount.

For more information, see chapter 5.

Introduction

Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA.

Contributions not reported. You do not report Roth IRA contributions on your return.

What is a Roth IRA?

A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined below). It can be either an account or an annuity. Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Set Up.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Neither a SEP-IRA nor a SIMPLE IRA can be designated as a Roth IRA.

Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live.

Traditional IRA. A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. Traditional IRAs are discussed in chapter 1.

When Can a Roth IRA Be Set Up?

You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited. See When Can I Make Contributions, later under Can I Contribute to a Roth IRA.

Can I Contribute to
a Roth IRA?

Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:

$160,000 for married filing jointly or qualifying widow(er),
$10,000 for married filing separately and you lived with your spouse at any time during the year, and
$110,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year.

TAXTIP: You may be eligible to claim a credit for contributions to your Roth IRA. For more information, see chapter 5.

Is there an age limit for contributions? Contributions can be made to your Roth IRA regardless of your age.

Can I contribute to a Roth IRA for my spouse? You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit (discussed in chapter 1 under How Much Can Be Contributed?) and your modified AGI is less than:

$160,000 for married filing jointly,
$10,000 for married filing separately and you lived with your spouse at any time during the year, and
$110,000 for married filing separately and you did not live with your spouse at any time during the year.

Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, and taxable alimony and separate maintenance payments. For more information, see What Is Compensation? under Who Can Set Up a Traditional IRA? in chapter 1.

Table 2-1. Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI).

IF you have taxable compensation and your filing status is ...	AND your modified AGI is ...	THEN ...
married filing jointly or qualifying widow(er)	less than $150,000	you can contribute up to $3,000 ($3,500 if age 50 or older) as explained under How Much Can Be Contributed.
	at least $150,000 but less than $160,000	the amount you can contribute is reduced as explained under Contribution limit reduced.
	$160,000 or more	you cannot contribute to a Roth IRA.
married filing separately and you lived with your spouse at any time during the year	zero (-0-)	you can contribute up to $3,000 ($3,500 if 50 or older) as explained under How Much Can Be Contributed.
	more than zero (-0-) but less than $10,000	the amount you can contribute is reduced as explained under Contribution limit reduced.
	$10,000 or more	you cannot contribute to a Roth IRA.
single, head of household, or married filing separately and you did not live with your spouse at any time during the year	less than $95,000	you can contribute up to $3,000 ($3,500 if age 50 or older) as explained under How Much Can Be Contributed.
	at least $95,000 but less than $110,000	the amount you can contribute is reduced as explained under Contribution limit reduced.
	$110,000 or more	you cannot contribute to a Roth IRA.

Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.

Subtract any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (conversion income). Conversions are discussed under Can I Move Amounts Into a Roth IRA, later.
Add the following deductions and exclusions:
1. Traditional IRA deduction,
2. Student loan interest deduction,
3. Tuition and fees deduction,
4. Foreign earned income exclusion,
5. Foreign housing exclusion or deduction,
6. Exclusion of qualified bond interest shown on Form 8815, and
7. Exclusion of employer-paid adoption expenses shown on Form 8839.

You can use Worksheet 2-1 to figure your modified AGI.

CAUTION: Conversion income must be taken into account when computing other AGI-based phaseouts and taxable income. You disregard conversion income only for the purpose of figuring your modified AGI for Roth IRA purposes.

How Much Can Be Contributed?

The contribution limit for Roth IRAs depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.

Roth IRAs only. If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of:

$3,000 ($3,500 if you are 50 or older), or
Your taxable compensation.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced.

Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

This means that your contribution limit is the lesser of:

$3,000 ($3,500 if you are 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or
Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs.

However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained next under Contribution limit reduced.

Simplified employee pensions (SEPs) are discussed in chapter 3. Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 4.

Contribution limit reduced. If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Use Table 2-1 to determine if this reduction applies to you.

Figuring the reduction. If the amount you can contribute must be reduced, figure your reduced contribution limit as follows.

Start with your modified AGI.
Subtract from the amount in (1):
1. $150,000 if filing a joint return or qualifying widow(er),
2. $-0- if married filing a separate return, and you lived with your spouse at any time during the year, or
3. $95,000 for all other individuals.
Divide the result in (2) by $15,000 ($10,000 if filing a joint return, qualifying widow(er), or married filing a separate return).
Multiply the maximum contribution limit (before reduction by this adjustment and before reduction for any contributions to traditional IRAs) by the result in (3).
Subtract the result in (4) from the maximum contribution limit before this reduction. The result is your reduced contribution limit.

Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.

1.	Enter your adjusted gross income (Form 1040, line 36 or Form 1040A, line 22)	1.
2.	Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA	2.
3.	Subtract line 2 from line 1	3.
4.	Enter any traditional IRA deduction (Form 1040, line 24 or Form 1040A, line 17)	4.
5.	Enter any student loan interest deduction (Form 1040, line 25 or Form 1040A, line 18)	5.
6.	Enter any tuition and fees deduction (Form 1040, line 26 or Form 1040A, line 19)	6.
7.	Enter any foreign earned income and/or housing exclusion (Form 2555, line 43 or Form 2555-EZ, line 18)	7.
8.	Enter any foreign housing deduction (Form 2555, line 48)	8.
9.	Enter any exclusion of bond interest (Form 8815, line 14)	9.
10.	Enter any exclusion of employer-paid adoption expenses (Form 8839, line 30)	10.
11.	Add the amounts on lines 3 through 10.	11.
12.	Enter: $160,000 if married filing jointly or qualifying widow(er) $10,000 if married filing separately and you lived with your spouse at any time during the year $110,000 for all others	12.
	Next. Is the amount on line 11 more than the amount on line 12? Yes. See the *Note* below. No. The amount on line 11 is your *modified adjusted gross income* for Roth IRA purposes.
	*Note.* If the amount on line 11 is more than the amount on line 12 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. Refigure your AGI without taking into account any income from conversions. (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI.) Then go to list item 2) above under Modified AGI or line 4 above in Worksheet 2-1 to refigure your modified AGI. If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 11 above.

You can use Worksheet 2-2 to figure the reduction.

Worksheet 2-2. Determining Your Reduced Roth IRA Contribution Limit

Before using this worksheet, check Table 2-1 to determine whether or not your Roth IRA contribution limit is reduced. If it is, use this worksheet to determine how much it is reduced.

1.	Enter your modified AGI for Roth IRA purposes	1.
2.	Enter: $150,000 if filing a joint return or qualifying widow(er) $0 if married filing a separate return and you lived with your spouse at any time during the year $95,000 for all others	2.
3.	Subtract line 2 from line 1	3.
4.	Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return $15,000 for all others	4.
5.	Divide line 3 by line 4 and enter the result as a decimal carried to three places. If the result is 1.000 or more, enter 1.000	5.
6.	Enter the lesser of: $3,000 ($3,500 if 50 or older), or Your taxable compensation	6.
7.	Multiply line 5 by line 6	7.
8.	Subtract line 7 from line 6. Round the result up to the nearest $10. If the result is less than $200, enter $200	8.
9.	Enter contributions for the year to other IRAs	9.
10.	Subtract line 9 from line 6	10.
11.	Enter the lesser of line 8 or line 10. This is your reduced Roth IRA contribution limit	11.

TAXTIP: Round your reduced contribution limit up to the nearest $10. If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200.

Example. You are a 45-year-old, single individual with taxable compensation of $113,000. You want to make the maximum allowable contribution to your Roth IRA for 2002. Your modified AGI for 2002 is $100,000. You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $3,000. Using the steps described above, you figure your reduced Roth IRA contribution of $2,010 as shown on Filled-in Worksheet 2-2.

Filled-in Worksheet 2-2. Example of Determining Your Reduced Roth IRA Contribution Limit