The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997 and is named for Senator William Roth. Since then, the Roth IRA has been very useful because of its characteristics. Let's go over the various features and rules behind the Roth IRA.
The largest benefit of the Roth IRA is that savings and earnings inside the account grow tax-free. When it comes to withdrawing funds from the account, you do not have to pay income taxes on it, as long as you are older than 59 1/2, and you've surpassed the minimum holding period, which is 5 years.
Because the Roth IRA account can grow tax-free, there are no Required Minimum Distributions (RMD). As mentioned in the last paragraph, the 59 1/2 early withdrawal penalty still applies.
What also applies, as it did with the Traditional IRA, are exemptions to that penalty.
- Unreimbursed medical expenses (over 7.5% of AGI)
- Health insurance premiums while unemployed, for one of the following reasons
- You lost your job.
- You were granted unemployment benefits for a period of 12 weeks.
- You either received the disbursements in the same year you received your unemployment benefits or the next year.
- The payments were made to you no later than 60 days after you started working again.
- Permanent disability
- Qualified higher education expenses
- Inherited IRA - death distribution
- First primary residence - up to $10,000
- Substantially equal periodic payments
- Fulfill IRS levy
- Called to active duty
For more information on that, visit the IRS website.
Contribution limits are the same as the Traditional IRA - $6,500 for anyone under 50 years of age and $7,500 for anyone 50 or older.
However, like the Traditional IRA has income limitations for tax deductibility, the Roth IRA has income limits for who is able to open and contribute to a Roth IRA.
For single filers, you're able to fully contribute to a Roth if you make less than $138,000. If you make more than $1138,000, but less than $153,000, you're able to contribute some but not the max. If you make more than $153,000, you're not able to contribute at all.
For married filers, you're able to fully contribute to a Roth if you make less than $218,000. If you make more than $218,000, but less than $228,000, you're able to contribute some but not the max. If you make more than $228,000, you're not able to contribute at all.
However, if you have you are not able to contribute directly to a Roth due to income limitations, you can still take advantage of the back-door contribution. The back-door Roth IRA contribution is when you contribute to a Traditional IRA (won't qualify for a tax deduction) and then do a Roth conversion. You'll have to pay taxes when you convert your account from a Traditional to a Roth, but then your account will grow tax-free.