The Roth IRA is perhaps the premier individual retirement planning tool and savings account offered today. In this article, we're going to discuss the full range of Roth IRA benefits, the basics of withdrawals, transfers, and contributions. Then we'll finish up with some comparisons between the Roth IRA, and employer sponsored plans such as the 401(k) and 403(b).
Roth IRA Benefits
Unlike Traditional IRAs, the Roth IRA does not provide the investor with a federal income tax deduction for contributions. However, they do provide a benefit that isn't found in any other retirement plan: the tax-free withdrawal of all earnings and principal.
Distributions
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Another nice feature of the Roth IRA is related to minimum distributions. Unlike other retirement vehicles, accountholders are not required to take distributions from their Roth IRA at any age. The "normal" or qualified distributions occur after age 59 1/2, and the plan has to be in existence, starting with the date the account owner first contributed to a Roth, for at least five years.
There are also several qualifying distributions, or withdrawal exceptions, that can be made from a Roth IRA 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:
Distributions made because the accountholder became disabled.
Distributions made to the beneficiary of their estate.
Up to $10,000 can be withdrawn to pay for a new home or rebuild a new home.
For more information on this topic, take a look at our article: IRA withdrawals.
Eligibility
Unlike Traditional IRAs, there is no age limit for Roth IRA contributions. There are however, income or compensation limits that determine how much someone can contribute to a Roth IRA.
In 2020, accountholders are eligible to contribute to a Roth IRA as long as their modified adjusted gross income (AGI) meets the following requirements:
For married couples filing jointly, their AGI must be less than $206,000.
For married couples filing separately, the AGI limit is $10,000.
Individuals with a filing status of single, head of household, or married filing separately (and not living with their spouse in that tax year), then the AGI limit is $139,000.
In 2021, accountholders are eligible to contribute to a Roth IRA as long as their modified adjusted gross income (AGI) meets the following requirements:
For married couples filing jointly, their AGI must be less than $208,000.
For married couples filing separately, the AGI limit is $10,000.
Individuals with a filing status of single, head of household, or married filing separately (and not living with their spouse in that tax year), then the AGI limit is $140,000.
The above compensation limits apply to full or what are called phase-out contribution limits. For more detail on this topic, take a look at our article: IRA Contribution Limits.
Contribution Rules
In 2020, individuals can contribute up to $6,000 ($7,000 if they are age 50 or older) to a Roth IRA, less all contributions made to other IRA plans. The Roth IRA rules allow individuals that are age 50 and over to make a catch-up contribution of $1,000. In 2021, the contribution limits remain at $6,000 ($7,000 if age 50 or older).
A spouse can also make contributions to a Roth IRA as long as the above income limits are not exceeded. Individuals can place funds into a Roth IRA anytime during the year, up until the due date for a tax return, which is usually around April 15th.
Current information for contributions, as well as catch up and income limits appear in the tables below:
Roth IRA Contribution Limits (2006 through 2021)
Year | Standard Contribution | Catch Up Contribution |
2006 to 2007 | $4,000 | $5,000 |
2008 to 2010 | $5,000 | $6,000 |
2011 to 2012 | $5,000 | $6,000 |
2013 | $5,500 | $6,500 |
2014 | $5,500 | $6,500 |
2015 | $5,500 | $6,500 |
2016 | $5,500 | $6,500 |
2017 | $5,500 | $6,500 |
2018 | $5,500 | $6,500 |
2019 | $6,000 | $7,000 |
2020 | $6,000 | $7,000 |
2021 | $6,000 | $7,000 |
2022 | Indexed to Inflation |
2020 Roth IRA Income Limits
Filing Status | Full Contribution | Contribution Phased Out | No Contributions |
Single Filers | $124,000 | $124,000 - $139,000 | $139,000 or more |
Joint Filers | $196,000 | $196,000 - $206,000 | $206,000 or more |
2021 Roth IRA Income Limits
Filing Status | Full Contribution | Contribution Phased Out | No Contributions |
Single Filers | $125,000 | $125,000 - $140,000 | $140,000 or more |
Joint Filers | $198,000 | $198,000 - $208,000 | $208,000 or more |
Conversions and Rollovers
When Roth IRAs were first introduced, there was a great deal of interest in converting a Traditional IRA to a Roth. Generally, there are three ways to conduct this conversion:
Rollovers: an IRA rollover is simply an eligible distribution from a Traditional IRA that is rolled-over into a Roth IRA within 60 days after the distribution.
Same-Trustee Transfers: if the account trustee for the Traditional IRA is the same trustee as the Roth IRA, that trustee can make the account transfer on the accountholder's behalf.
Trustee-to-Trustee Transfers: many times the Traditional IRA trustee will make a transfer to a new Roth IRA trustee on the accountholder's behalf; even if they are not the trustee receiving the funds.
If an individual takes a distribution from a Traditional IRA, the 60-day rollover rule applies. If at all possible, convert the Roth IRA using a trustee-to-trustee transfer or same-trustee transfer. This should help to avoid the 60-day rule.
Conversion Income Limits
The adjusted gross income of individuals that want to convert from a Traditional IRA to a Roth IRA cannot be greater than $100,000. This conversion limit applies to taxpayers with filing statuses of single, head of household, and married filing jointly. Married taxpayers filing separate returns are explicitly excluded from making Roth conversions.
Please be aware that converting to a Roth IRA means paying additional income taxes on the money converted. For more information on this topic, take a look at our detailed article: Roth IRA Conversions.
Roth IRAs versus Other Retirement Savings Plans
Individuals oftentimes wonder which funding option is best: Roth IRA, Traditional IRA, or even a 401(k) plan if they're offered at work. Everyone's situation is unique, but here are some general rules to follow:
Roth IRA versus 401(k) plans: If an employer offers a 401(k) plan, then chances are the employer is also matching contributions. If possible, maximize the contributions that are matched before any money goes towards a Roth IRA. This approach provides an instant return on investment when an employer matches contributions. We've discussed 401(k) contribution limits in an earlier article.
Roth IRA versus Traditional IRA: While Traditional IRAs provide instant tax relief (contributions are tax deductible), accountholders will have to pay taxes on all monies withdrawn. Roth IRAs are not tax deductible, but all monies withdrawn are free from federal income taxes. If an individual has ten plus years before retirement, their investment in a Roth IRA should grow to such a degree that they are entitled to a larger tax benefit upon withdrawal, relative to the early tax benefit of a Traditional IRA.
There are arguments against this last statement, especially if someone is in a high tax bracket now (Traditional IRAs would provide a larger benefit today), and expect to be in a lower tax bracket in retirement (diminishing the tax benefit of a Roth IRA). But remember, these are simple rules of thumb. It's always a good idea to seek out the assistance of a professional tax advisor if circumstances arise that warrant making a change.
Anyone that would like more detailed information on this particular subject should take a look at our articles on Roth versus a Traditional IRA and Roth versus a 403(b), which provide some illustrative examples that also apply to 401(k) plans.
Funding a Roth IRA
As we mentioned at the beginning of this article, we believe the Roth IRA is one of the best retirement savings plans offered today. While it's certainly important to understand all of the rules and policies established for Roth IRAs, it's also important to understand if a retirement plan is working. To help answer that question, we have several free retirement tools:
Retirement Calculators: at last count we have nearly two dozen different retirement calculators to choose from, including one dedicated to Roth IRA funding and another that can help users choose between a Roth and Traditional IRA.
Retirement Guide: we also have a retirement guide that can help users decide between Roth IRAs and 401(k) plans.
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