Roth IRA
Who may open a Contributory Roth IRA?
Anyone who earns wages or a salary (even if self-employed) can open and contribute to a Roth IRA provided you don't exceed the adjusted gross income limits in the chart below. Also, there are no age limits as with a Traditional IRA. If you are married and file a joint return, you and your spouse can both open a Parnassus Roth IRA even though your spouse has no earned income. You may contribute to a Roth IRA even though you are an active participant in an employer-sponsored retirement plan, a government retirement plan, the social security system or the railroad retirement system, or are receiving any type of retirement benefits.
How much may I contribute to a Roth IRA?
You may contribute up to $4,000 per tax year if you are under age 50. Individuals who have attained age 50 may contribute up to $5,000 per tax year. If you file a joint return, the same amount may also be contributed to a Spousal Roth IRA even if one spouse has little or no compensation. The maximum combined contribution is limited to 100% of your combined earned income. The annual limit is reduced by any of your contribution made to a Traditional IRA. Also, contributions to a Roth IRA are phased out based on your adjusted gross income (AGI) for the taxable year as follows:
| Married Taxpayers Filing Jointly | Single Taxpayers | Married Taxpayers Filing Separately |
|---|---|---|
| $150,000-$160,000 | $95,000-$110,000 | $0-$10,000 |
Earned income is considered:
- All wages and salary you earn from employment;
- Income from tips, professional fees, bonuses, and commissions;
- Money earned as sole proprietor or partner for personal services rendered; and
- Alimony which you report on your taxes.
Earned income does not include:
- Money you receive from pensions, annuities or other types of deferred compensation; and
- Earnings on investments, interest, dividends or rental income, and proceeds from the sale of investments.
What is a Rollover Roth IRA?
There are two types of Rollover Roth IRAs: Roth IRA to Roth IRA and Traditional IRA to Roth IRA. There is no yearly limit on the amount that may be rolled into a Rollover Roth IRA. Balances in an employer's qualified retirement plan may not be rolled over into a Roth IRA.
Roth IRA to Roth IRA Rollover
This transaction involves a distribution from one Roth IRA and a subsequent purchase of another Roth IRA. The entire transaction must take place within 60 days, and you are allowed to make a Roth IRA to Roth IRA rollover only once in any 12-month period.
Traditional IRA to Roth IRA Rollover
An IRA holder may roll over (convert) their Traditional IRA to a Roth IRA. The 60-day rule does apply; however, the rule allowing only one rollover per 12-month period does not. You cannot make a Traditional IRA to Roth IRA rollover if:
- Your Adjusted Gross Income for the taxable year exceeds $100,000, or
- You are married, but file separate income tax returns.
IMPORTANT NOTE: The IRA holder must pay tax on all pre-tax dollars distributed from the Traditional IRA.
An individual cannot roll over a qualified retirement plan or 403(b) plan distribution to a Roth IRA. However, an individual can roll from a qualified plan to a Traditional IRA and then roll (convert) the amounts in the Traditional IRA into a Roth IRA.
Can I transfer my Roth IRA?
Yes. There are no tax penalties and no limits on the amount you can transfer. Just fill out the IRA Transfer Request Form [pdf] and mail it back to us and we will handle the transfer for you.
If I cannot take a deduction for my Roth IRA contribution, why should I contribute?
The greatest benefit of a Roth IRA is that all earnings will be tax-free upon distribution. This can make a big difference. The longer the contribution is in the IRA and the more it earns, the bigger the benefit. Also, consider the goal of an IRA which is to provide enough money to live comfortably during retirement.
When can I withdraw?
You can withdraw from your Roth IRA at any time, but withdrawals of earnings that do not meet certain criteria (i.e., a non-qualified distribution) would be taxed and may incur a 10% distribution penalty.
What is a Qualified Distribution?
A distribution of assets from a Roth IRA may be taken tax free for qualified distributions. A qualified distribution is a distribution of assets that are held in a Roth IRA for at least five taxable years (beginning with the first taxable year for which the Roth IRA holder made a contribution) and one of the following events occurs:
- Attainment of age 59 and 1/2
- Disability
- The purchase of a first home up to a $10,000 lifetime limit
- Death
What is a Non-Qualified Distribution?
When an IRA holder takes a distribution from their Roth IRA that is not "qualified," the distribution is considered "non-qualified" and may be subject to tax and/or IRS penalty. Whether it is subject or not depends on the type of assets that are deemed distributed. The "ordering rules" specify that if you made both contributory and conversion contributions (even if the contributions have been maintained in separate IRA's), the assets distributed will be considered taken in the following order:
- 1. Roth IRA annual contributory amounts
- 2. Converted assets that were taxable prior to the conversion
- 3. Converted assets that were non-taxable prior to the conversion
- 4. Roth IRA earnings
This distribution sequence allows you to withdraw, at any time, an amount equal to or less than your annual contributory amounts without tax or IRS penalty. Once the contributory assets have been depleted, your conversion assets will be distributed. All converted assets are tax-free, however, a 10 percent penalty will apply if you withdraw the taxable converted assets (#2 above) within five years of the conversion and do not meet one of the exceptions (attainment of age 59 and 1/2, death, disability, substantially equal periodic payments, health insurance, medical expenses, education expenses and first-time home buyer). After the conversion assets have been exhausted, the Roth earnings are distributed which may be fully taxable and may incur a 10% IRS penalty.
Tax Questions about Roth IRAs?
The customer service representatives at Parnassus are happy to help you with your questions about IRAs, however, Parnassus Investments is not responsible for determining or maintaining records regarding your eligibility for tax benefits. You may want to contact a qualified tax professional before opening a Roth IRA. For more information, you may contact your local office of the Internal Revenue Service. For more detailed information request IRS Publication 590, Individual Retirement Arrangements, by calling the IRS at 1-800-TAX-FORM or going to their website at www.irs.gov.
Can I make contributions to my IRA automatically?
Yes. Parnassus offers automatic investment plans. You may arrange to have contributions of $50 or more automatically deducted from your checking or savings account and invested in your IRA. All automatic contributions are considered contributions for the current tax year. When setting up your investment plan, make sure not to exceed your annual contribution limit.
Are there any special fees?
There is a custodial fee of $15.00 a year or a onetime lifetime fee of $60.00 for maintaining the IRA per participant. This means that even though you have multiple accounts in your ROTH, Traditional IRA or SEP, you are charged only a single $15 per year fee or $60 lifetime fee.
For more details see our IRA Disclosure Statement [pdf]