Knowing all the Roth IRA rules is a key competency for anyone saving for retirement. The first thing to understand is that you fund your Roth IRA with money on which youâve already paid income taxes. That means you pay no income taxes on withdrawals.
âEvery dollar you take out of a 401(k) is not a true dollar â youâre going to have a tax liability,â said Rob Greenman, a financial planner in Portland, Ore. âThe idea of having some assets that are growing tax-free, and being able to withdraw the amount in retirement and keep every nickel, thatâs pretty cool.â
Other big benefits of a Roth IRA include the absence of any requirement to start taking required minimum distributions at age 70 Â˝, as with other types of retirement accounts. You can leave money in your Roth and pass it on to your heirs or your favorite charity, if you so choose. Plus, you can withdraw contributions at any time, period, without paying any penalties â thatâs a big advantage over many other forms of retirement account. (To withdraw earnings without penalty, however, youâll need to wait until you turn 59 Â˝, and the account must have been open for at least five years).
Read on for a full brief of all the Roth IRA rules â weâve got you covered.
Among the basic Roth IRA rules is that you must have earned income. Anyone can open a Roth so long as they have reported income to the IRS below certain income thresholds (more on that in a sec). A teenager with a part-time job could open a Roth IRA, but a kid earning cash in the summer mowing lawns canât open a Roth (unless they claim it as income â but what kid does that?).
âIt canât be, âMy mom paid me to babysit,ââ Greenman said. In general as long as youâre working and have either W2 or 1099 income, you can put money into a Roth.
Non-working spouses or spouses with very low wages can also open a spousal Roth IRA. You must be married and filing a joint tax return to make this possible.
In 2019, investors can contribute up to $6,000 to a Roth IRA, or up to $7,000 if theyâre 50 or older; in 2018, investors could put away up to $5,500 and $6,500, respectively. How much you can save in a Roth also depends on your income â and above certain thresholds, youâre not eligible to contribute at all:
|Roth IRA Contribution Guidelines|
|Tax Filing Status||Modified Adjusted Gross Income (MAGI)||Contribution Limit|
|Single||< $122,000||$6,000 ($7,000 if 50 or older)|
|âĽ $122,000 but < $137,000||Partial contribution*|
|âĽ $137,000||Not eligible|
|Married filing jointly||< $193,000||$6,000 ($7,000 if 50 or older)|
|âĽ $193,000 but < $203,000||Partial contribution*|
|âĽ $203,000||Not eligible|
|Married filing separately||< $10,000||Partial contribution*|
|âĽ $10,000||Not eligible|
*If you fall into a partial contribution category, use Fidelityâs calculator to determine how much you can save.
There are a few other rules to understand when it comes to Roth IRA contributions:
You can open a Roth IRA at any broker or robo-advisor that offers the account, such as Vanguard, Schwab, Fidelity, Wealthfront or Ally. Look for a company that provides access to the investments you want, and pay attention to the costs involved.
âYou should focus on fees, because those fees eat into the returns that markets provide,â Greenman said, advising that whichever company you work with, there are some questions you should make sure to ask: âWhat are the available investment options, what are they going to charge to buy or sell investments, and what are the underlying expenses of the investments youâre buying?â
Generally, a Roth IRA works like any other retirement account â you can start withdrawing money at 59 Â˝. But there are some other things to know. For instance, you can withdraw your contributions from your Roth IRA at any point, no matter how old you are, and you wonât owe taxes or pay a penalty. There are different rules for the earnings, however. Hereâs how it breaks down:
If you withdraw earnings â rather than contributions â from your Roth IRA before age 59 Â˝, you may owe taxes and penalties. However, you might only owe taxes but no penalties in the following situations:
You can withdraw contributions at any point without paying any taxes or penalties. However, if you withdraw earnings, youâll owe taxes if the account is less than five years old.
If your income is too high, making you ineligible to open a Roth IRA, thereâs still a way in. Itâs called a backdoor Roth IRA.
A backdoor Roth involves putting money into a traditional IRA account, and then converting the account to a Roth IRA. If you havenât paid taxes on the money yet, youâll need to do that as the conversion is considered income in the year it takes place. If you have other IRA accounts and they arenât all pre-tax â youâve paid taxes on some money, but not on all of it â it may be worth consulting a financial professional, as the tax calculation can get complicated.
In any given year, you can convert as much of your traditional IRA to a Roth IRA as you want, as long as youâre prepared to pay the tax bill. In other words, youâre not limited to $6,000 if your balance is higher than that.
Itâs also worth noting that there are different withdrawal rules for money thatâs been converted to a Roth. All converted money â both contributions and earnings â must be in the account for five years before you withdraw it, or youâll pay a 10% penalty; in addition, note that the clock starts on Jan. 1 of the year in which you convert.
With some retirement accounts, youâre required to start withdrawing a minimum amount from the account each year starting at age 70 Â˝; this is true for traditional IRAs.
However, if you own a Roth IRA, there is no required minimum distribution age. âYou can just leave it there for your great grandkids,â said Jon Ten Haagen, a financial planner in Huntington, NY. âYou donât ever have to take it out.â
This is a nice thing on two levels. First, it gives you more control in terms of your tax situation, so if youâre not looking to draw down income in a given year, you donât have to take any funds out of your Roth. Second, itâs a great way to earmark funds for an inheritance.
âNot only are you going to be giving money away, but youâre going to be paying the tax up front,â Greenman said. Your heirs can even inherit the money and leave it invested â theyâll have to start taking distributions, but they can stretch the distributions over the course of their lifetime, allowing the balance to continue its tax-free growth. âItâs super powerful,â Greenman said.
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