Ken Julian, EVP of Client Portfolios with Halsey Associates, is here to help you get through your tax season. In this post, he’ll debunk Roth IRA myths and talk about specific questions on how penalties can apply. Here’s your questions and what Ken had to say.

Myth #1: If I convert my Traditional IRA to a Roth IRA, will it affect my taxes?

Ken: No, as long as you do not qualify for any other tax benefits that would deny you converting your IRA.

Myth #2: My Roth IRA is not taxed. Why would I pay taxes on it?

Ken: Although you do not have to pay income tax when you contribute to a Roth IRA, there are still penalties for taking money out – early or at the wrong time.

1) The earnings portion of your withdrawal that is tax-free will be subject to a 10% penalty on IRAS that were opened in 2010 or later. In this case, you would owe 10% tax on the earnings portion of your withdrawal. In addition, if it is an early withdrawal (less than 59 ½ years old), there is an additional 10% penalty. This means if you took out $10,000 from your Roth IRA to help with paying for unexpected expenses, you would only be able to keep $6,000 of it.

2) You will pay a 10% penalty on IRAs opened before 2010 unless the money is used towards qualified medical expenses. The good news is that this 10% tax does not apply when you take money out for retirement at 59 1/2 years old or older.

MYTH #3: I do not want to pay taxes in the future, so I would rather keep my money in a Traditional IRA.

Ken: Although you may not have to pay income tax on your contribution, there is still a possibility that earnings from the Traditional IRA could be taxed in the future. If this is your concern, a Traditional IRA and Roth IRA are not mutually exclusive; you can have both at the same time as long as they fit within each other’s specific tax requirements.

Myth #4: Is there an age limit for contributing to a Roth IRA?

Ken: There are two age limits you should be aware of. If you are 70 ½ years old, your contributions to a Roth IRA will stop because there is no tax benefit for contributing to an account requiring income tax payments.

The other age limit involves the ability to contribute and not face taxes on Earnings. You must have earned income if you are under 70 ½ years old. This means that if you only receive dividend or investment income, you cannot contribute to a Roth IRA.

Myth #5: If I don’t get married until later in life, is there a chance that my spouse can’t take advantage of my Roth IRA?

Ken: If you are married and you inherit a Roth IRA, your spouse can be the beneficiary of your account. The bad news is that if they decide to receive payments from this income stream, they will have to pay taxes. They can avoid this by taking possession of the money and waiting until they are 59 ½ years old to take payments.

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