Roth IRA Rules

#SafeMoney #JonHeischmanSr #RothIRARules
In this week's episode host Jon Heischman, Senior talks about the rules surrounding Roth Individual Retirement Accounts.

Call Jon at [phone] with questions, comments or to get a free copy of Top 10 IRA Mistakes and How to Avoid Tax Traps. Visit www.heischmanfs.com/ for additional information

Episode Transcript

Speaker 1 (00:02):
People really don't know what their expenses will because they
don't know how long that they're going to live. The
Americans are worried they won't have enough safe for retirement.

Speaker 2 (00:09):
Now more than ever, retirement's going to cost for many
folks over a million dollars.

Speaker 3 (00:14):
He is no short thing in investing, but a lot
of people think that annuities may come close to that.

Speaker 1 (00:19):
It's going to more safe, safe, safe, safe things that
they know.

Speaker 3 (00:22):
If they know they're going to need that money to
supplement the retirement, well then you can't play that rest.
This is the Safe Money and Retirement Show. But John
Heischman Senior, Founder and partner of Heisman Financial Services serving
the Columbus and surrounding areas. John specializes in educating pre
retirees and retirees about safe money strategies and ideas. Now

(00:43):
it's the Safe Money and Retirement Show. Here's John Heischman, Senior.

Speaker 2 (00:48):
Good morning, you've tuned into the Safe Money and Retirement Show.
Thank you. I'm glad you did. I'm your host, John Heischmann.
Before I get started, I want to give you my
contact information. Feel free to call me with any questions

(01:08):
and suggestions on maybe what you would like to hear
me talk about on the Safe Money and Retirement Show.
And if you're looking for a second opinion, or maybe
you don't have an advisor. Now that's kind of common

(01:29):
today because so many have retired left the profession and
more and more people seem to be stuck without an
advisor and their accounts become what I call a house account.
They're given a one eight hundred number to call if
they've got questions. And when we're talking about large amounts

(01:51):
of money planning your retirement generating income, you need to
develop a relationship with a planner that you can work
with during your retirement. So here's the information. You can
call me at eight eight eight four two six zero

(02:13):
one seven seven. So write that number down. I'll give
it to you again triple eight four two six zero
one seventy seven. Visit my website at HEISCHMANNFS dot com.
H E I S C H M A n FS

(02:37):
dot com. I have gotten a lot of calls this year,
not only from radio listeners but referrals and clients about
roth iras and what are the rules of a roth ira?

(02:58):
And I'm sure most of you have heard a lot
about roth iras converting to roth iras non taxed the
five year rule. So I thought I would take a
show and discuss some important points about roth iras because

(03:21):
they are popular. But you need to know the rules.
You can't make a mistake on this, or I should say,
you should be working with someone that knows the rules.
So really you don't have to be bothered with that,
but you need to trust the advisor that knows the
roth ira rules. Roth Ira rules always permit an individual

(03:48):
to withdraw their contributions without tax penalty. Now this makes
sense because taxes have already been paid on the amount
you've contributed to your roth ira. But the question then becomes,
how are the earnings taxed? And here's what gets a

(04:11):
lot of people confused. Analyzing wroth ira distributions, as I mentioned,
can be a difficult process many people. They try to
solve it at one time, but that usually leads to
errs and gets them in trouble. So you must follow

(04:34):
this sequence or your advisor must follow this sequence. Is
this a qualified distribution? If so, none of the money
in the income tax or is penalized. In other words,
the entire distribution is tax free and ten percent penalty free.

(05:00):
Number two. If the distribution is not a qualified distribution,
then you must determine how much of it comes from
the contributions, then conversions from the oldest conversion first, then earnings.

(05:20):
Now that you know how much of the distribution comes
from each category, we're going to want to determine how
much is subject to income tax and how much is
subject to the ten percent portion. Distributions from a roth

(05:40):
IRA they're either going to be qualified or non qualified.
If a distribution is qualified, then there is no income
tax and again no ten percent early withdrawal penalty tax
on any earnings. A distributionbution is qualified if the distribution

(06:04):
is made after attainment of age fifty nine and a half,
death or disability, or if it is made to a
first time home buyer for the purchase of a home
limited to a maximum distribution of ten thousand dollars a
five year holding period has been met. So, as you

(06:30):
can see, there's two requirements for making a rough IRA
distribution qualified. In both of these requirements must be met
for the distribution to be qualified, and they're four tax free.
If either requirement is not met, the distribution's going to

(06:55):
be considered non qualified and the earnings will be taxable,
possibly subject to penalties. So we have to avoid this.
Know the rules to avoid you getting into trouble. Unless

(07:15):
an exception applies, meaning disability, medical expenses, education, the taxable
portion of the non qualified distribution is going to be
subject to a ten percent early withdrawal penalty. This penalty
is in addition to the ordinary income tax DO or

(07:40):
non qualified distribution. Too many times everyone assumes I have
a roth IRA when I take the money out of there,
it is not going to be tax Now generally, yes,
that it's true. But what I'm doing is going over

(08:04):
some exceptions and trying to point out there's more to
the WROTH distributions than being tax free. It's all about
qualifying to see if it is going to be non taxed.

(08:25):
A little bit ago, I mentioned the five year rule,
so I want to touch on that because it is
important when we're determining tax free distributions from a WROTH.
So I can best describe it by saying, the five
year clock starts on January first of the year for

(08:50):
which the contribution is made. I'll give you an example.
Let's assume an investor establishes a roth IRA make to
deposit on April fifteenth, twenty twenty three, and this is
going to be for the twenty twenty two tax year.

(09:10):
The distribution is being made for the twenty twenty two
tax year, so the clock would be considered started January
one of twenty twenty two, even though the contribution itself
is being made in twenty twenty three. Why because it's

(09:35):
for the previous year twenty twenty two. So the five
year clock starts at the beginning of twenty twenty two.
That's fair. Any subsequent contributions into a roth IRA account
would be on this initial clock. There is not a

(09:57):
new clock for each contribution, which in my opinion, is
a good thing, very important. Now keep in mind I'm
not talking about roth conversions here. Basically for those that
start a WROTH or maybe already have a wroth and

(10:22):
possibly still making contributions. Now here's something that I like
and is very important. In very few people, I mean
very few know about it, and I can go into
more detail with you. But the five year holding period
starts January one. That I mention of the year when

(10:46):
the first contribution is made, and it applies even if
the individual establishes multiple contributory wroth I rays. In other words,
the five year holding period begins in the first year
of the first wroth IRA contribution, regardless of whether future

(11:12):
contributions are made to the same or a different WROTH account.
We have clients that have multiple wroth accounts following this rule.
And again I really like this rule because you don't
have a new clock starting for every contribution or account.

(11:37):
Once you get it started, the clock's ticking. So we'll
see clients that may have part of their WRATH in
a brokerage account, mutual funds, ETFs, stocks, bonds, and another
in a tax deferred annuity, so they're diversifying on their

(11:59):
WROTH the counts and we'll be able to schedule distributions
in the future when they retire. I have a lot
of information about the roth iras, but I've put together
a simplified booklet of information which is yours upon request.

(12:25):
So when you call in just mention roth IRA information
eight eight eight four to two six zero one seventy seven,
triple eight four to two six zero one seventy seven,
that's the number to call. I also welcome the opportunity

(12:47):
to show you how we do diversification on roth iras,
which of course there is no charge, there's no obligation,
just hoping I can help in some way. AIGHTA eight
four two six zero one seven seven. I'm going to

(13:08):
take a break now, so stay tuned because I'm going
to continue my discussion on roth Ier Race. I'll be
right back.

Speaker 4 (13:20):
Thanks for listening to The Safe Money and Retirement Show
with John Heischman. For more information, call one eight eight
eight or two six zero one seventy seven. That's one
eight eight eight four two six zero one seven seven,
or visit their website at HEISCHMANFS dot com. More of
the Safe Money and Retirement Show in a moment. Thanks

(13:48):
for listening to The Safe Money and Retirement Show with
John Heischman at Heischman Financial Services. No one is excluded
from receiving the help they need. Here's John Heischman.

Speaker 1 (13:59):
We don't care if you have fifty thousand save for
retirement or five million.

Speaker 2 (14:05):
We have no cutoff.

Speaker 1 (14:07):
As a matter of fact, personally, I feel those that
have let's say under two hundred and fifty thousand, or
even under one hundred and fifty thousand, in many ways
need more planning advice than somebody that has considerable assets
available to them at retirement. So whatever the case may be,

(14:33):
we're willing to work with you and give your accounts
the exact same attention as if you had five million.

Speaker 4 (14:43):
Call John Heischman at Heischman Financial Services one eight eight
eight or two six zero one seven seven. That's one
triple eight four two six zero one seven seven, or
visit their website at HEISCHMANFS dot com. Welcome back to

(15:07):
the Safe Money and Retirement Show with John Heisman. To
contact John, the number to call is one eight eight
eight or two six zero one seven seven. That's one
eight eight eight or two six zero one seven seven.
Once again, here's John Heisman.

Speaker 2 (15:24):
Welcome back to the Safe Money in Retirement Show, our
second part of the show. For this morning, I'm your host,
John Heischman. I was discussing roth iras, trying to give
more of an understanding on how the ross work and

(15:46):
give a little bit more detail as far as what
you want to look for. I ended the first session
with the five year holding period, so let me reiterate
and give you an example. So we have Victor. He

(16:07):
established a roth ira at age sixty and died two
years later in order for his beneficiaries. To avoid taxation
on any earnings, they're going to need to meet the
five year holding period requirement. So as you can see,

(16:29):
it also applies to death. This five year holding period
started when Victor opened the roth ira, so there wouldn't
be any three more years before the five year period
was satisfied, but the beneficiaries could withdraw up to the

(16:51):
amount that he contributed plus any conversion amount made by
Victor without taxation, since principle comes out first then earnings. Now,
from a planning perspective, as I see it, if an

(17:12):
individual is considering funding a roth ira in the future,
I usually suggest making a small contribution as soon as
possible to establish this roth ira, just to get the

(17:32):
clock started. Because any future contributions, regardless of where those
contributions go, as far as what type of plan let's
say one year, two year, three year down the road,
they're already in that five year period, so that's a
big advantage. Qualified distributions they're going to be tax free,

(18:00):
but non qualified distributions they're going to be taxed. But
such distributions they're going to be subject to the wroth
ira what we call ordering rules. These rules treat contributions
as being distributed first and then any earnings. So no

(18:27):
portion of such a distribution is going to be treated
as ordinary income until all contributions have been distributed. So
not to get detailed here, but again I want to
emphasize the point it establishing a roth ira, and this

(18:51):
is whether it's an individual or through an employer. Let's
say it's in a four to h one K account,
which has been very popular in four oh one K
accounts last couple of years. You need to know the
taxation because it's different when we talk about qualified and

(19:15):
non qualified. But see that's what I'm here for to
help you. And if you're thinking of starting a roth
ira or converting a portion of your traditional ira, contact me.
Will put together a game plan based on what you have,

(19:39):
how much you want to convert, what the taxes are
going to be, and should it be qualified or non
qualified eight eight eight four to two six zero one
seven seven triple eight four two six zero one se

(20:01):
don't forget I've got information to send you in reference
to a roth ira. So when you call the number
I give you, just say I want roth ira information.
Most of my regular listeners have heard me talk about
roth iras in the past as well as traditional I

(20:26):
am a big believer in having both. Depending on your
tax situation each year would determine your contribution to either
a roth ira or a traditional. In the years that

(20:46):
you need a tax deduction, many CPAs are going to
encourage you to make a contribution to your traditional ira.
In those years where you're not going to have a
tax problem, make that contribution to the roth ira. This

(21:11):
can be beneficial to those whose income fluctuates. For example,
somebody that has income from commissions, maybe they're ten ninety
nine instead of a W two. Maybe there's a year
of where you receive bonuses, or any situation that is

(21:35):
going to create a tax problem, meaning you're going to
pay more tax this year simply because of something you
sold or let's say inherited, whatever the case may be,
that's going to create a tax problem. You want to

(21:56):
have the option to contribute to a traditional, but in
a given year you don't need to write off there's
your contribution going to a roth ira. Many of my
listeners still have four to one K plans and today,

(22:16):
as I mentioned earlier, a lot of them are going
to have an option where you can contribute to a
wroth and a traditional The typical four to one K
plan has been a qualified account that rolls over to
an IRA a traditional IRA, but there could be a

(22:40):
portion that is a roth IRA, So we keep those
separate unless we're going to do a conversion traditional ira
to that roth IRA. Now, if you already have one
established and you want to convert to additional to a

(23:01):
rough as I talked about earlier, you've already established that
roth But the bottom line is we're trying to establish
future retirement income and what is the most tax friendly
form of income. Obviously it's going to be that rough

(23:25):
ira because you meet all the requirements, then you start
taking distributions, it's tax free income. If you're getting ready
to roll over a retirement plan where you're employed, we
need to take a good look at the tax situation.

(23:50):
There's several options. When we talk about tax obviously it's
not going to be beneficial, and almost all cases to
actually receive a lump sum instead postpone payments of taxes
on certain distributions from a qualified retirement plan. By doing

(24:16):
a transfer, it's actually called a rollover all or part
of the distribution to an individual retirement account a traditional IRA.
It's a tax free transfer from one retirement plan being
your four to one K, to another being your own

(24:40):
individual IRA. You will need to know the types of
rollovers and that depends on are you going into a
new job, a new profession. Are you going to be
fully retired in design to roll that to your own

(25:01):
individual IRA? And we also want to take a look
at is there any advantage of keeping that money in
the four to h one K. Not very often, but
there are certain situations where it might make sense and
we need to review that. The bottom line is your
best interest when doing a rollover? Where's the best place,

(25:26):
what is the best product? Where should that money go? Well,
I'm out of time for this morning show. I hope
it was beneficial for you that you learned some new ideas,
new strategies that are available, and encourage you to contact

(25:51):
me to answer your questions, provide you with clarity and
review your accounts a day date four two six zero
one seven seven. Tune in next week at the same
time the same station for the Safe Money and Retirement Show.

(26:14):
I'm your host, John Heischman, and thank you again for
joining me this morning.

Speaker 3 (26:21):
The Safe Money and Retirement Joe John Heisman Senior. To
get in touch with John, call one AA eight four
two six zero one seven seven. That's one triple eight
four two six zero one seven seven. For more information
about Heisman Financial Services, visit their website heisman FS dot com.

(26:42):
That's h E I S C H M A n
f S dot com. Join us again next time for
the Safe Money and Retirement Show with John Heisman Senior