Moneyzine
Contents
/Personal Finance/Roth IRAs

Roth IRAs

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
Advertiser Disclosure

Definition

Introduced as part of the Taxpayer Relief Act of 1997, Roth IRAs are individual retirement accounts, which provide investors with several significant advantages when compared to Traditional IRAs.

Explanation

Contributions to Roth IRAs are never tax deductible; however, if certain requirements are satisfied, distributions taken from Roth IRAs are tax-free. Unlike a Traditional IRA, the account holder is not required to take mandatory distributions. It's also possible to make contributions to a Roth IRA after reaching age 70 1/2.

In 2019, individuals can contribute to a Roth IRA as long as their Modified Adjusted Gross Income, or MAGI, is less than:

  • $137,000 for those filing taxes as single, head of household, or married filing separately (and not living with a spouse)

  • $10,000 for married filing separately, and not living with a spouse

  • $203,000 for those with a filing status of married filing jointly

The contribution limits for a Roth IRA are $5,500 in 2018 and $6,000 in 2019, or $6,500 and $7,000 with the catch-up contribution that applies to individuals age 50 or older.

Qualified distributions, or withdrawals, from an account must occur after age 59 1/2 and the plan has to be in existence, starting with the date the investor first contributed to a Roth, for at least five years. Non-qualified distributions may be subject to additional tax penalties.

There are also several withdrawal exceptions, allowing for penalty-free distributions before the age of 59 1/2. This holds true as long as the plan has been in existence for at least 5 years. If so, qualified distributions include:

  • Those made because the accountholder has become disabled

  • Distributions made to the beneficiary of the accountholder's estate

  • Up to $10,000 can be withdrawn to pay for a new home or rebuild a new home

Our article on Roth IRA Contribution Limits has up-to-date information on contributions, rollovers, as well as deduction phase out thresholds.

There are many benefits, but also a lot of circumstances where it might be a bad idea to set up a Roth IRA - visit our article to find out more.

Related Terms

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 18th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 18th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.