Roth IRA: Basics
A Roth IRA (Individual Retirement Account) is a powerful tool for retirement savings, offering unique tax advantages and flexibility, whether you’re just starting to save or considering a conversion from a traditional IRA.
Key Features of Roth IRAs:
Who Can Contribute: If you have taxable compensation and your Modified Adjusted Gross Income (MAGI) is below the phase-out range for your filing status, and there is no age limit for making contributions.
Tax-Free Growth: Earnings grow Tax-Free, and qualified withdrawals are not taxed
No Required Minimum Distributions (RMD): Roth IRAs do not require you to take a minimum distribution during your lifetime.
Flexible Withdrawals: Contributions (but not earnings) can be withdrawn at any time, tax and penalty-free
Eligibility Based on Income: Your ability to contribute is phased out at high Income levels
Single or Head of Household: A full contribution can be made if MAGI is less than $150,000. Contributions start to phase out between $150,000 and $165,000; no contribution can be made if MAGI is $165,000 or more
Married filing jointly: A full contribution can be made if MAGI is less than $236,000. Contributions start to phase out between $236,000 and $246,000; no contribution can be made if MAGI is $246,000 or more
Married Filing Separately: Phase out from $0 - $10,000
Tax Treatment of Contributions and Distributions
Contributions: Not deductible on your tax return
Qualified Distributions: Tax-free if the account has been open for at least five years and you are age 59½ or older, disabled, or deceased, when paid to your beneficiary
Nonqualified Distributions: May be subject to income tax and a 10% early withdrawal penalty on earnings, but contributions can always be withdrawn tax- and penalty-free
Required Minimum Distributions: Roth IRAs are not subject to RMDs during the account owner’s lifetime. However, beneficiaries must follow RMD rules after the owner’s death.
A Roth IRA is a flexible, tax-advantaged retirement savings vehicle that can play a key role in your long-term financial plan. By understanding the contribution limits, income eligibility, tax treatment, and distribution rules, you can maximize the benefits of your Roth IRA and build a more secure retirement.