Roth IRA Q&A

The Roth IRA turns twenty years old this year. The retirement vehicle was part of the Tax Relief Act of 1997 and it was seen as such a boon to savers, many believed that it would not survive. Two decades later, it is alive and well. As many Americans consider funding retirement plans this tax season, it’s a good opportunity to provide you with a Roth Q&A.

What Is a Roth IRA?

A Roth IRA is an individual retirement plan, which allows participants to save for the future. Unlike other plans, like a traditional IRA or an employee-sponsored 401(k), contributions to a Roth IRA are not tax-deductible. Contributions to a Roth IRA are made with after-tax dollars, but the money in the account grows tax-free. When you take a qualified distribution from your Roth IRA, you do not have to pay taxes on the money.

Who can contribute to a Roth IRA?

Not everyone, because there are income limits for Roth contributions. For 2016 tax filing season, you can contribute to a Roth IRA if you have taxable compensation and your modified Adjusted Gross Income is less than:

  • $194,000 for married filing jointly or qualifying widow/widower (contribution reductions start at $184,000)
  • $132,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, (contribution reductions start at $117,000) and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

How much can I contribute to a Roth?

Like a traditional IRA, you can put $5,500 into a Roth. If you are over age 50, you can add an extra $1,000, for a total of $6,500.

Can I access my Roth before age 59 1/2?

Roth IRA withdrawal and penalty rules vary depending on your age, but generally speaking, because you have contributed an after-tax dollar into the account, you can withdraw contributions at any time tax- and penalty-free. To do so, you will need to keep spotless accounting records on your annual contribution amounts.

What’s Magic about Having a Roth for Five Years?

Five years must have elapsed since the tax year of your first Roth contribution before you can access the earnings (vs. the contributions discussed above) in the account without taxation. This rule applies to all owners, regardless of age. Presuming you reach the five-year hurdle, you can access funds after 59 ½, but there are a number of exceptions that may allow you to access your Roth before age 59 1/2. For example, you can use Roth funds for a first-time home purchase (up to a $10,000 lifetime maximum); to cover qualified education expenses, to pay for unreimbursed medical expenses or health insurance if you’re unemployed or if you become totally disabled. Check the IRS rules for a rundown of qualified distributions and exceptions.

Do I Need to take a Required Minimum Distribution (RMD) from a Roth IRA?

No. Roth IRA owners never have to withdraw money if they choose not to do so. However, upon the death of a Roth IRA owner, the beneficiaries must take RMDs, but the distributions are still tax-free.

Who Should Use a Roth?

Those who think that they will earn more in the future or who believe that tax rates will rise. The Roth is also great for those who want to enjoy tax benefits during their lives and then be able to pass on funds that have already been taxed to their heirs.