BENEFIT FROM ROTH IRA 'ORDERING RULES'

All the hype regarding Roth IRAs so far in 2010 has been about the new rules for conversions. For the first time ever, taxpayers can convert a traditional IRA to a Roth, regardless of their annual income. Previously, conversions weren't allowed for taxpayers with a modified adjusted gross income (MAGI) over $100,000.

But nothing has changed in the rules for Roth IRA distributions. Unless payouts are treated as "qualified distributions," they are subject to tax.

Nevertheless, despite the common perception, the tax burden on taxable distributions may be less than you think. Some "taxable" distributions might be completely tax-free. The exact tax treatment depends on the "ordering rules" for Roth IRA distributions.

If a withdrawal meets the requirements for a qualified distribution, it is 100% exempt from tax. A qualified distribution is one that is made from a Roth IRA in existence for at least five years after reaching age 59 1/2, upon death or disability or used to pay first-time homebuyer expenses (up to a lifetime limit of $10,000).

All other distributions are nonqualified. Nonqualified distributions are treated as coming from Roth IRA assets in the following order:

• Regular Roth IRA contributions
• Taxable traditional IRA conversions
• Nontaxable traditional IRA conversions
• Earnings on Roth IRA assets

Because distributions are treated as coming first from Roth contributions, you may be able to take out as much as you put in -- at any time -- without any dire tax consequences. Do not hesitate to contact our office at (816) 792-9966 to schedule a consultation with one of our experienced staff members.

Very truly yours,

Robert C. Jones

www.rcjonesinc.com