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 401k and 403b.
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.
Another nice feature of the Roth IRA is related to minimum distributions. Unlike other retirement vehicles, you are not required to take distributions from your 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 you 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:
For more information on this topic, take a look at our article on IRA withdrawals.
Unlike Traditional IRAs, there is no age limit for Roth IRA contributions. There are however, income or compensation limits that determine how much you can contribute to a Roth IRA.
In 2012, you're eligible to contribute to a Roth IRA as long as your modified adjusted gross income (AGI) meets the following requirements:
In 2013, you're eligible to contribute to a Roth IRA as long as your modified adjusted gross income (AGI) meets the following requirements:
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 on IRA Contribution Limits.
In 2012, you can contribute up to $5,000 ($6,000 if you 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. In 2013, the contribution limits increase to $5,500 ($6,500 if you are age 50 or older).
Your spouse can also make contributions to a Roth IRA as long as the above income limits are not exceeded. You can place funds into a Roth IRA anytime during the year, up until the due date for your 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 2014)
2012 Roth IRA Income Limits
2013 Roth IRA Income Limits
Conversions and Rollovers
When Roth IRAs were first introduced, there was a great deal of interest in converting a Traditional IRA to a Roth IRA. Generally, there are three ways that you can convert a Traditional to a Roth:
If you take a distribution from a Traditional IRA, then the 60-day rollover rule applies. If at all possible, you should convert your Roth IRA using a trustee-to-trustee transfer or same-trustee transfer. This helps you to avoid the 60-day rule.
Conversion Income Limits
If you want to convert from a Traditional IRA to a Roth IRA, then your adjusted gross income or AGI 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.
Just be aware that converting to a Roth IRA means you may have to pay additional income taxes on the money converted. For more information on this topic, take a look at our detailed article on Roth IRA Conversions.
Roth IRAs versus Other Retirement Savings Plans
You may be wondering which option is best in your situation: Roth IRA, Traditional IRA, or even a 401k plan if they're offered at work. Everyone's situation is unique, but here are some general rules that you can follow:
There are arguments against this last statement, especially if you are in a high tax bracket now (Traditional IRAs would give you 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 you think your situation warrants making a change.
If you'd like more detailed information on this particular subject, take a look at our articles on Roth versus a Traditional IRA and Roth versus a 403b, which provide some illustrative examples that also apply to 401k 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 your retirement plan is working. To help answer that question, we have several free retirement tools:
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