Joseph D. Coco, Jr. CFP®

Whitepaper

Managing Owner

[email protected] www.cocoenterprisesllc.com

Roth IRAs: What You Need to Know Introduction A Roth individual retirement arrangement (IRA) is a tax advantaged retirement plan created by Congress as part of the Taxpayer Relief Act of 1997. Generally, the growth and earnings on Roth IRA qualified distributions are not taxed. Roth IRAs may hold common stock, bonds, mutual funds, certificates of deposit, bank savings and money markets funds, as well as many other investment securities, including insurance annuity contracts. Depending on age and income, you may or may not be eligible to fund a Roth IRA. Why consider a Roth IRA? The biggest advantage of Roth IRAs is that funds contributed (though not earnings) can be withdrawn at any time and for any reason without being taxed or penalized. Since you pay your taxes before contributing to a Roth IRA, it is not funded with pre-tax income, meaning taxes on the contributions have already been paid. Earnings however, can be withdrawn tax and penalty free after age 59½, provided you have held the Roth IRA for at least 5 years. There are no age-based requirements to begin distributions, and you can continue making contributions indefinitely, if you qualify and you desire to do so. When a Roth IRA owner dies, the spouse may claim sole ownership of that Roth, even if the spouse also has a Roth IRA; and, the spouse may combine the two Roth IRAs without penalty. Also, assets in a Roth IRA can be distributed to beneficiaries tax-free whether or not the heir is a spouse. If you are a first-time homebuyer, you can use up to $10,000 of Roth IRA earnings without tax or penalty, provided the house is for yourself or specific family members, such as a spouse, child, or parent. Also, earnings can be withdrawn at any time without incurring a 10% early withdrawal penalty when the funds are used for qualified higher education for yourself or a close family member, like a child. (Note: because the rules governing premature withdrawals before age 59 ½ can be complex, we recommend you consult IRS Publication 590 and your tax advisor before withdrawing any funds). Eligibility Requirements In 2014 you are eligible to contribute up to $5500 ($6500 if you are 50 year of age or older) into your Roth IRA annually. If you learn less than the maximum allowable annual contribution for your age group, you may only contribute an amount equal to or less than your earnings. Roth contributions are subject to phase outs based on the following income and tax filing parameters: Investors filing jointly: $181,000-$191,000 Modified adjusted gross income (MAGI) Investors filing Single, Head of Household: $114,000-$129,000 MAGI Investors filing separately: $0-$10,000 MAGI For example, if you are 52 years of age and you file your tax return as single, head of household, if your MAGI is $120,000, you will only be eligible to contribute $3900 rather than $6500. Non-working spouses are eligible to contribute the maximum allowable amount to a Roth IRA as long as the working spouse’s earnings meet or exceed what is invested into both the working and non(Continued on page 2)

COCO Enterprises, LLC. 6442 Hwy. 93 South Whitefish , MT 59937 Bus: 406-862-9400 Fax 406-862-5063 TF 888-370-9745

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working spouses’ Roth IRA’s, and the MAGI income does not exceed income-based eligibility requirements as shown above. For example, a 47 year old small business owner earns $9000 MAGI; therefore he and his 51 year old non-working spouse are only eligible to contribute $9000 total into both Roth IRA’s, rather than $12,000. Establishing a Roth IRA A Roth IRA must be established with an IRS-approved institution. These include banks, credit unions, savings and loan institutions, and brokerage firms. Roth IRAs can be opened any time of the year. And, so long as you meet the IRS tax filing deadline (April 15 of the next calendar year), you can contribute your maximum eligible amount to a Roth IRA at any time during the tax year or at any time the following year, prior to April 15; therefore, you have until April 15, 2014 to establish a Roth IRA and make contributions for the 2013 tax year. Funding a Roth IRA You may contribute any amount at any time to your Roth IRA, up to your maximum allowable contribution. Depending on how you derive income, your funding eligibility may vary. If you work for an employer, Roth IRAs can be funded by your eligible compensation, which is defined as hourly wages, salaries, bonuses, commission, and other compensation you receive for services rendered to the employer. This income is typically what you would see in Box 1 of your IRS Form W-2. If you are self-employed or are a partner in a business partnership, determining your eligible compensation is a bit more complicated. Take net earnings and subtract any contributions you made to another retirement account, and then subtract the amount equal to 50% of your self-employment taxes. If you have recently divorced and were issued financial compensation as a result of the divorce, any taxable amount of that compensation is to be treated as income for the purposes of making contributions to a Roth IRA. Compensation deemed ineligible for the purposes of making contributions to a Roth IRA include rental income or profits made from the maintenance of rental property, interest or dividends of any kind, pension, annuity, or social security income, or any other compensation not deemed taxable income. Who Should Consider a Roth IRA? Everyone who has money they don’t need to touch for more than a year and whose earned income qualifies them to fund a Roth IRA should consider it. If you miss the opportunity to fund your Roth IRA before April 15th for the previous year, the opportunity is gone forever. Here are a few considerations to keep in mind before funding your Roth IRA: 

Eliminate all consumer debt first.

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Ensure you have at least 3-6 months of expenses in the emergency savings fund.

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Capture all available matching funds offered in your employer sponsored retirement plan.

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The longer you leave your funds in a Roth IRA, the greater the benefit in the future.

COCO Enterprises, LLC. 6442 Hwy. 93 South Whitefish , MT 59937 Bus: 406-862-9400 Fax 406-862-5063 TF 888-370-9745