ROTH IRA Disclosure Statement

ROTH IRA Disclosure Statement
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Federal Tax Law Information for ROTH IRAs

This Summary provides a simplified overview of federal tax law requirements concerning the Traditional Individual Retirement Account (IRA) offered by ("Custodian"). Terms defined in the Traditional IRA Custodial Agreement ("Agreement") hold the same meaning in this Summary.

Section I – Account Revocation Rights

You have the option to revoke this Account within seven (7) days from its establishment date. If you choose to do so, you're entitled to a refund of the contributed amount without adjustments for factors like sales commissions or market value changes. To revoke, send a written notice to: Alts Custodian Inc, Attn: Individual Account Services, 8 The Green, Ste. A, Dover, DE 19901. If mailed, the notice is considered sent on the postmark date (or certified/registered mail date) when deposited in the U.S. mail with proper postage.

Section II – IRA Contributions

Typically, you can contribute cash to a Roth IRA up to the lesser of the annual limit or 100% of your compensation. The annual contribution limit is $7,000 for 2024, with subsequent adjustments for inflation each year. This limit encompasses all your IRAs, whether traditional or Roth. If you're 50 or older by year-end, you can make additional catch-up contributions of up to $1,000 annually to your Roth IRA. Starting in 2024, this catch-up contribution limit for individuals aged 50 or older will be indexed for inflation.

If your modified adjusted gross income (MAGI) exceeds certain thresholds, your contribution limit may be reduced or phased out entirely. For single individuals, the phase-out begins at a MAGI of $161,000 for 2024. For married couples filing jointly, it starts at a MAGI of $240,000 for 2024. Married individuals filing separately face phase-outs at a MAGI of $10,000 for 2024. For guidance on calculating MAGI and related limitations, consult IRS Publication 590-A.

If you and your spouse file jointly, both have taxable compensation, and meet income criteria, you can each contribute to separate Roth IRAs annually, limited by the lower of the annual cap or 100% of your combined compensation. However, contributions are subject to the aforementioned MAGI phase-out limits. Assuming both spouses earn at least the annual cap in compensation, they can each max out their Roth IRA contributions, totaling $14,000 for 2024. Contributions to spousal Roth IRAs can be unevenly distributed but must not exceed the annual limit for either spouse.

Contributions for a tax year must be made to your Roth IRA by the due date of your federal income tax return for that year, excluding extensions (typically April 15 for most individuals).

Section III – No Deductions

You cannot claim a deduction for your Roth IRA contribution on your income tax.

Section IV – Excess Contributions

If you exceed your allowable contribution limit in any given year, you typically face a 6% tax on the excess amount. This tax must be reported to the IRS using Form 5329. However, if you withdraw the excess contribution along with any associated earnings before your tax return due date, including extensions, the excess won't be subject to the 6% tax. However, you must include the earnings on the excess contribution in your income.

If excess contributions remain undistributed beyond the tax return due date, including extensions, they can be carried over to a subsequent year if the contributions for that year fall below the maximum allowed limit. However, you'll incur a 6% tax on the excess contribution for the year it was made. If you choose to spread the excess contribution over multiple years, the 6% tax will apply to the remaining excess amount each year.

Section V – IRA Distributions

Distributions from your Roth IRA are not considered part of your gross income if they qualify as 'qualified distributions.' These distributions are those made after a five-year period beginning with the tax year of your first Roth IRA contribution, and they occur on or after you reach age 59½, are due to your disability, are made to a beneficiary or your estate after your death, or are for the initial purchase of a home.

Distributions that do not meet the criteria for qualified distributions may be subject to taxation. Contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are distributed from your Roth IRA in a specific order: first from regular contributions, then from conversion and rollover contributions based on a first-in, first-out basis, and finally from earnings on contributions. Rollover contributions from other Roth IRAs are not considered for this purpose.

Non-qualified distributions from your Roth IRA before age 59½ may incur a 10% additional tax unless they qualify for an exception. However, this additional tax does not apply to the portion of your Roth IRA distribution that is not included in your income. Exceptions include distributions for medical or educational expenses, first home purchases, qualified disaster distributions, coronavirus-related distributions, qualified birth or adoption distributions, distributions to terminally ill individuals, distributions for emergency personal expenses, and distributions to domestic abuse victims. Under certain circumstances, you may have the option to re-contribute such distributions within three years from the date of receipt, subject to specific limitations. It's important to note that distributions from your IRA do not qualify for capital gains treatment or for the five-year or ten-year averaging available for certain lump sum distributions from other retirement plans. For comprehensive guidance on the tax treatment of IRA distributions, it's advisable to consult with your tax advisor.

Section VI – Required Minimum Distributions

You are not obligated to take distributions from your Roth IRA during your lifetime. However, upon your death, the Roth IRA becomes subject to the required minimum distribution (RMD) rules. Non-spouse individual beneficiaries, with limited exceptions for eligible designated beneficiaries, must withdraw the entire inherited IRA balance within ten years of your death. Spouse beneficiaries and certain non-spouse beneficiaries who qualify as eligible designated beneficiaries can generally stretch the distribution of the inherited IRA over their own life expectancy if distributions begin by the end of the calendar year following your death. Special rules apply to minors and beneficiaries that are not individuals, such as trusts or estates. If your spouse is the sole beneficiary, they may choose to treat the Roth IRA as their own. From 2024 onwards, a surviving spouse who is the sole beneficiary of the IRA and chooses not to treat it as their own may have the option to use the Uniform Lifetime Table rather than the Single Life Table to determine RMDs.

Failure by your beneficiary to withdraw the RMD for a year will result in a penalty tax. This tax is 25% of the difference between the RMD and the actual withdrawals for the year, but it can be reduced to 10% if the shortfall distribution is made within two years before the IRS imposes the tax. It is essential to consult a tax or financial advisor as it is the beneficiary's responsibility to ensure compliance with the RMD requirement. The Custodian will execute withdrawals from your Roth IRA strictly based on your or your beneficiary's explicit instructions.

Section VII – Rollovers and Transfers

A rollover refers to the transfer of cash or assets from a retirement plan or IRA to another retirement plan or IRA. The transferred amount maintains its tax-deferred status if specific requirements are met until distributed. Rollover contributions to an IRA aren't bound by annual contribution limits and aren't deductible on tax returns. While the Custodian isn't tasked with verifying the legitimacy of rollover contributions, they may request certification to ensure accurate records.

You can also transfer funds directly from one IRA to another in a trustee-to-trustee transfer, exempt from the time constraints described below.

ROTH IRA to another ROTH IRA: You can withdraw from one traditional IRA and roll over all or part of it to another traditional IRA. If completed within 60 days, the rolled-over amount isn't subject to federal income tax or the 10% additional tax. Only one rollover between IRAs is allowed within a 12-month period. When transferring funds from one Roth IRA to another, the five-year period for qualified distributions remains unchanged. This period commences with the tax year of the initial Roth IRA contribution.
Traditional IRA to Roth IRA: Converting amounts from a traditional IRA to a Roth IRA involves withdrawing from the traditional IRA and rolling it over into a Roth IRA within 60 days. Taxes are owed in the conversion year on the portion representing untaxed earnings and contributions. Roth IRA conversions cannot be reversed. The 10% additional tax generally doesn't apply unless a distribution is taken within five years of the conversion.
Rollovers to and from Employer-Sponsored Plans: Distributions from an IRA, excluding after-tax amounts, can be rolled over tax-free to an employer's qualified plan, and vice versa, subject to restrictions. Rollovers to an IRA must occur within 60 days of distribution receipt. Consult a tax advisor for guidance on rollovers to or from employer-sponsored plans.
Rollovers from 529 Plans. Effective from 2024 onwards, specific sums moved from a 529 plan to a Roth IRA held for the 529 account's designated beneficiary are tax-exempt, including the 10% additional tax, provided the 529 plan has been active for a minimum of 15 years, the transfer is conducted as a direct trustee-to-trustee transfer, and other specified conditions are met.

Section VIII – Prohibited Transactions and Loans

If you or your beneficiary partake in a prohibited transaction with the Account, as defined in Internal Revenue Code section 4975, the Account's tax-exempt status will be forfeited. Consequently, you must include the fair market value of the amount involved in the prohibited transaction in your gross income for the year it occurred, along with any regular income tax due. Should you use any part of the Account as collateral for a loan, that portion is treated as distributed to you, and you must include it in your gross income for the taxable year in which the Account was used as collateral. It's your responsibility to determine if a transaction qualifies as a prohibited transaction.

Section IX – IRA Statutory Requirements

The IRA trustee or custodian must be an entity like a bank, trust company, or another individual approved by the Secretary of the Treasury. The assets of the Account will remain separate from other property, except when pooled in a common trust fund or investment fund. None of the Account's funds will be invested in life insurance contracts. The Account Owner's interest in the Account balance is nonforfeitable.

Section X – Financial Disclosure

The fees applicable to the Account are outlined in the IRA Fee Schedule. By establishing the Account, you agree to adhere to the fees outlined in the IRA Fee Schedule. The growth or decline in the Account's value is not assured or forecasted and is contingent upon the performance of your chosen investment strategy. Profits or losses incurred by each individual account are attributed to that specific account.

Section XI – Approved Form

The Account conforms to IRS standards in terms of its format, utilizing the precise language of Form 5305-A, as currently provided by the IRS, along with additional permissible language. However, it's important to note that IRS approval pertains solely to the form of the Account and does not imply an assessment of its merits. The SECURE 2.0 Act, enacted on December 29, 2022, builds upon the adjustments introduced in the SECURE Act of 2019, affecting IRA regulations. Although these new regulations are in effect, the custodial agreements governing accounts at Alts Custodian have not yet been updated to reflect the changes outlined in the SECURE Act and SECURE 2.0. We will inform you once the custodial agreements have been revised to incorporate the updated rules.

Section XII – Further Information

This Summary offers general information and isn't exhaustive or tailored to specific circumstances. Consult qualified professionals for personalized advice or additional questions regarding IRAs.

For more information, refer to IRS Publications 590-A and 590-B, available from local IRS offices or online at www.IRS.gov (http://www.irs.gov/), or by calling 1-800-TAX-FORMS.