03 Nov Age 70 1/2 and your Roth IRA

Q. I’m over 70 1/2 and I work part-time as an independent contractor. My 1099 is approximately $10,000 a year. Is the contribution limit on the Roth at my income level the same as for the standard amount? Which parts are tax-free: the withdrawals, the earnings or the original contributions?
— Still saving

A. Like many IRS rules, those surrounding IRA contributions are chock full of “ifs” and “thens.”

Saving in a Roth IRA is a good option for those over 70 1/2 who are not eligible for traditional IRA contributions.

You can make an non-deductible contribution to a Roth IRA up to $5,500, and because you’re over age 50, you can save an additional $1,000 catch-up contribution, said Gail Rosen, a Martinsville-based certified public accountant.

But, she said, this contribution can only be made up to a limit of 100 percent of your earned income. So if you earned less than those limits, you can’t save the max.

The big question for you: What is your earned income?

“You say that your income per your 1099 is approximately $10,000,” Rosen said. “Your earned income is your net income, which is your gross income — the $10,000 — less all allowable deductible expenses.”

But if you have other income, you’re going to need to consider that when deciding if you can contribute to a Roth.

Rosen said the allowable IRA limits, including for Roth IRAs, phase out ratably, in $10 increments, if your income is over the following levels of modified adjusted gross income:

• For joint taxpayers: $183,000 to $193,000
• For married filing separately: $0 to $10,000
• For single taxpayers and head of housed: $116,000 to $131,000

If you earn more, you can’t make a Roth contribution.

To the tax-free part of your question, so-called qualified distributions from a Roth IRA are not taxed at all.

The first rule is that you must be older than over 59 1/2 when you take out the money, and you’re there already.

The second way for a distribution to be considered qualified is if it’s within the five-year period beginning with the first tax year you made a contribution to a Roth IRA.

“So if this is the first year you ever made a contribution to a Roth IRA, then you have to wait five years to avoid having any earnings on the Roth IRA taxed,” Rosen said. “But, if you ever contributed to a Roth IRA in the past, then you may qualify for the five-year period rule.”

A non-qualified distribution is treated first as a non-taxable return of contributions, Rosen said. But if you take out more than your contributions — your earnings in the account — it is taxable.

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This story was first posted in November 2015.