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

Quick Summary

  • Roth IRAs are a type of tax-advantaged retirement savings account.
  • Contributions aren’t deductible, but qualified distributions (withdrawals) on contributions and earnings are tax-free.
  • Anyone with taxable income can contribute to a Roth IRA if their income is below a certain amount. 
  • Unlike traditional IRAs, there are no required minimum distributions (RMDs) for Roth IRAs.

What Is a Roth IRA?

A Roth IRA is a tax-advantaged retirement savings account named after William Roth, a former Delaware Senator. While Roth IRAs are similar to traditional IRAs, there are key differences that make Roth IRAs a better choice for some retirement savers. 

Roth IRA Withdrawal Rules

You can withdraw your IRA contributions—at any time, for any reason—tax-free and penalty-free. The reason? Your contributions are made with after-tax dollars. Because you’ve already paid taxes on that money, it’s yours to withdraw and spend as you choose. 

Withdrawals on earnings work differently. You can take tax-free withdrawals as long as you’re 59 ½ or older and you’ve owned the account for at least five years (the “5-year rule”). The five-year clock starts ticking on Jan. 1 of the year you made your first contribution. 

The 5-Year Rule

Your withdrawals may be subject to taxes and/or a 10% penalty, depending on your age and whether you’ve met the 5-year rule. Here’s a quick rundown.

If you meet the 5-year rule:
  • Under 59 ½: Earnings are subject to taxes and penalties. You may be able to avoid taxes and penalties if you use the money for a first-time home purchase (a $10,000 lifetime limit applies), or if you have a permanent disability or you pass away (and your beneficiary takes the distribution). 
  • Age 59 ½ and older. No taxes or penalties. 
If you don’t meet the 5-year rule:
  • Under 59 ½: Earnings are subject to taxes and penalties. You may be able to avoid the penalty (but not the taxes) if you use the money for a first-time home purchase (a $10,000 lifetime limit applies), qualified education expenses, or unreimbursed medical expenses, or if you have a permanent disability or you pass away (and your beneficiary takes the distribution). 
  • Age 59 ½ and older. Earnings are subject to taxes but not penalties. 

Required Minimum Distributions

Unlike traditional IRAs, there are no required minimum distributions (RMDs) on Roths. That means you can leave your Roth money untouched if you don’t need it during retirement. This is a definite perk for wealthier IRA holders who want to leave assets to their heirs tax-free. 

Beneficiaries of Roth IRAs don’t owe income tax on withdrawals and can stretch out distributions over many years; however, beneficiaries may still owe estate taxes.

Roth IRA Eligibility

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

While there are no income limits for traditional IRAs, you can’t contribute to a Roth IRA if you make too much money. Still, 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 the 2019 tax year, here’s what you can contribute to a Roth IRA, depending on your income, age, and tax-filing status.

IRA Contribution Limits

You can contribute up to $6,000 to a Roth IRA ($7,000 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 $122,000. 

If you are married filing jointly, you can contribute the maximum amount to a Roth IRA if your MAGI is less than $193,000 ($189,000 for 2018).

Making Partial Contributions

At higher income levels, you can contribute less, based on a formula devised by the IRS.  These partial contributions apply if you’re single and your MAGI is between $122,000 and $137,000, or if you’re married filing jointly and your MAGI is between $193,000 and $203,000.

You can’t contribute to a Roth IRA at all if your income is above those levels.

Special rules apply to married couples who live together at any time during the year but file separate tax returns. Neither can contribute to a Roth IRA if their income exceeds $10,000.

 

2019 Roth IRA Income & Contribution Limits

Filing Status MAGI Contribution Limit
Married filing jointly Less than $193,000 $6,000*
$193,000 to $202,999 Begin to phase out
$203,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)
Married filing separately Less than $10,000 Begin to phase out
$10,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)
Single Less than $122,000 $6,000*
$122,00 to $136,999 Begin to phase out
$137,000 or more Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)

* If you’re age 50 and up, you can contribute an extra $1,000 per year.

One caveat: If you earn less than the maximum contribution limit, you can contribute only as much as you earned. If, for example, you earned just $3,000, you could contribute a maximum of $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 cover the contributions to both accounts and the household income doesn’t exceed the IRS income-eligibility limits. 

Roth IRA Taxes

With traditional IRAs, you get a tax deduction on your contributions the year you make them. When you withdraw the money during retirement, you pay income tax on any pre-tax contributions and all earnings. Those withdrawals are taxed as regular income at your then-current tax rate. 

Contributions to Roth IRAs, on the other hand, are made with post-tax dollars—so they aren’t tax-deductible. Instead, your contributions and earnings grow tax-free, and all qualified distributions are tax-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 will benefit from decades of tax-free, compounded growth.

If your income is not higher than the IRS limit, and you anticipate being in a higher tax bracket later or wish to avoid RMDs in order to keep your funds invested, a Roth IRA may be your best long-term savings option.

Roth IRA Benefits

Some features of the Roth may influence your decision about whether to contribute to a Roth IRA:

  • Tax advantages. Your contributions and earnings grow tax-free, and withdrawals are tax-free and penalty-free once you reach age 59 ½ and meet the 5-year rule. 
  • Flexibility. You can withdraw your contributions at any time without taxes or penalties. Although you have to be at least 59 ½ and meet the 5-year rule to tap earnings tax-free and penalty-free, there are exceptions. 
  • No required minimum distributions. Roth account holders are never forced to withdraw money. This is particularly useful for estate-planning purposes because it allows the account balance to continue to grow. Beneficiaries 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 past retirement age, as long as you stay within the income limits.

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