Roth Individual Retirement Accounts (IRAs) are a good choice if you’re seeking tax-free withdrawals in retirement, want to avoid required minimum distributions beginning at age 70 1/2, or feel you’ll be in the same or a higher tax bracket in retirement. Roth IRAs offer you an opportunity to create tax-free income during retirement.
- Tax-deferred growth until retirement and tax-free withdrawals while in retirement
- The ability to withdraw your contributions without tax or penalty if you need the money
- No Required Minimum Distributions (RMDs) at age 70 1/2
Things to consider
- Your Modified Adjusted Gross Income (MAGI) determines your eligibility.
- You’re not able to deduct your contributions on your taxes, as they’re made with after-tax savings.
- Withdrawals of earnings before age 59 1/2 will be charged a 10% IRS early withdrawal penalty (some exceptions apply).
You can also convert pretax funds held in Traditional IRAs or employer-sponsored plans (401(k)s, 403(b)s, 457 plans, SEP IRAs, or SIMPLE IRAs) to a Roth IRA. Keep in mind you’ll have to include any converted amounts as income on your taxes. Learn more about converting to a Roth IRA.
Individuals and their spouses, if married filing jointly, with earned income are eligible to contribute to a Roth IRA as long as their MAGI meets the following limits:
- Maximum Roth IRA contribution for 2014: Full contribution if MAGI is less than $114,000 (single) or $181,000 (joint). Partial contribution if MAGI is less than $129,000 (single) or $191,000 (joint).
- Maximum Roth IRA contribution for 2015: Full contribution if MAGI is less than $116,000 (single) or $183,000 (joint). Partial contribution if MAGI is less than $131,000 (single) or $193,000 (joint).
Individuals or spouses, if married filing jointly, can each contribute up to $5,500 for 2014 and 2015, based on Roth IRA income limits. If you’re over age 50, you can make an additional catch-up contribution of $1,000 over the normal limit.
With a Roth IRA, you can withdraw your contributions at any time, free of tax or penalty. Earnings are income tax-free if you've held the account for five years or more and you’re age 59 1/2 or older. Earnings are also income-tax-free if made on account of disability/first home buyer/death. All require the five-year holding period.
However, if you make any withdrawals of earnings before age 59 1/2, you may be charged a 10% IRS early withdrawal fee. There are a few exceptions that allow you to avoid the 10% penalty:
- Qualified first-time home buyer ($10,000 lifetime limit)
- Qualified higher education expenses
- Qualified military reservist
- Medical expenses in excess of 10% of Adjusted Gross Income (AGI)
- Health insurance premiums for certain unemployed individuals
- Substantially equal periodic payments
Need to know more? Take a look at some frequently asked questions about IRAs.
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