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What Is a Roth IRA?

Matthew Malone

Roth IRAs are a great, tax-efficient way to save for your retirement.

A Roth IRA is an individual retirement account that offers a valuable future tax break: Tax-free income in retirement. Like beauty, the benefit of a Roth IRA is in the eye of the beholder and it all depends on the beholder’s tax bracket--both now and when he or she retires.

Although there is no up-front tax deduction for Roth IRA contributions as there is with a traditional IRA, Roth distributions are tax-free when you follow the rules. And because every penny you stash in a Roth IRA is your money—not a tax-subsidized gift from Uncle Sam—you can tap your contributions (but not your earnings) any time tax-free and penalty-free.

Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate. That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and who will benefit from decades of tax-free, compounded growth. Roth IRAs also appeal to anyone who wants to minimize their tax bite in retirement as well as older, wealthier taxpayers who want to leave assets to their heirs tax-free.

You can contribute to a Roth IRA at any age as long as you have earned income from a job. That means they are appropriate for everyone from child actors to septuagenarian Wal-Mart greeters.

Are You Eligible?

First things first. There are income eligibility limits, so if you make too much money, you can’t contribute to a Roth IRA. But with a median household income of about $50,000, most Americans qualify for Roth IRA contributions. (If your income is too high, you can convert some or all of the assets in your traditional IRA to a Roth IRA, but you’ll have to pay taxes on the entire amount you convert. For details, see more on Roth IRA conversions).

For 2014, you can contribute the maximum $5,500 to a Roth IRA ($6,500 if you are age 50 or older by the end of the year) if you are single or the single head of a household and your modified adjusted gross income (MAGI) is less than $114,000. Or, if you are married filing jointly, you can contribute the maximum amount to a Roth IRA if your income is less than $181,000. You may make a partial contribution to a Roth IRA if you are single and your income is between $114,000 and $129,000 or if you are married filing jointly and your income is between $181,000 and $191,000. You can’t contribute to a Roth IRA if your income is above those levels. (Special rules apply to married couples who live together at any time during the year but who file separate tax returns. Neither can contribute to a Roth IRA if their income exceeds $10,000.)1

2014 Roth IRA Income and Contribution Limits
Filing StatusMAGI Contribution Limit
Married filing jointly $181,000 or less $5,500**
$181,001 to $191,000 Begin to phase out
Greater than $191,000 Ineligible for a Roth IRA
Married filing separately $0$5,500**
$1 to $9,999Begin to phase out
Greater than $10,000 Ineligible for a Roth IRA
Single $114,000 or less $5,500**
$114,001 to $129,000 Begin to phase out
Greater than $129,000Ineligible for a Roth IRA

One caveat: If you earn less than the maximum contribution limit, you can contribute only as much as you earned. So if, (for example, you earned just $3,000, you could contribute only $3,000 to a Roth IRA for the year. Non-working spouses can contribute the maximum amount to a Roth IRA as long as the working spouse earns enough to contribute to both accounts and the household income doesn’t exceed the IRS income-eligibility limits. Learn more about Spousal IRAs.

Other Benefits

Beyond tax rates, some unique features of the Roth may influence your decision about whether to contribute to a Roth IRA.

  • Flexibility: You can withdraw your contributions at any time without taxes or penalty. Although you normally must hold the Roth account for at least five years and be at least 59 ½ before you can tap the earnings tax-free and penalty-free, there are exceptions, including death or disability of the account holder or to use up to $10,000 to purchase a first home for yourself or certain family members. In addition, you can avoid the 10% early withdrawal penalty, but will still incur income taxes, if you withdraw earnings early to pay higher-education costs for yourself or a family member.
  • No mandatory withdrawals: Roth account holders are never forced to withdraw money (traditional IRAs require withdrawals beginning at age 70 1/2). This is particularly useful for estate planning purposes because it allows the account balance to continue to grow. Heirs pay no income taxes on inherited Roth IRAs but they are required to take distributions over their lifetimes.
  • Saving during retirement: You can make contributions to a Roth if you continue to work in retirement as long as you stay within the income limits. Traditional IRAs do not allow contributions after age 70 ½.

Contribution Deadlines

Wish you had contributed to a Roth IRA for 2013 but afraid you missed the boat? No worries. You have until the April 15, 2014, tax filing deadline to make your Roth IRA contribution for 2013.

1Roth income eligibility limits are not affected by coverage by an employer retirement plan. Those limitations apply only to tax-deductible - contributions to traditional IRAs.

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Comments (4)
Thanks for this summary. Really quite interesting.
Is a federal pension considered 'earned income' ? I have no other income.
You can see the complete calculation for earning income at the IRS: http://www.irs.gov/businesses/small/article/0,,id=146823,00.html.
A federal pension is not considered "earned income" for Roth IRA contribution purposes. If that is your only source of income, you are not eligible to contribute to a Roth. However, if you are married and your spouse has a job, you can contribute up to $5,000 to a spousal Roth IRA($6,000 if you are age 50 or older) assuming your spouse earned at least that much for the year of your contribution.
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Important Roth Information

Each year, the IRS updates the rules for Roth IRA. Here are all the details for 2013 & 2014: