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).
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.
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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:
For more information on this topic, take a look at our article: 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 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:
In 2019, accountholders are eligible to contribute to a Roth IRA as long as their 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: IRA Contribution Limits.
In 2019, 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 2020, 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:
| 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 | Indexed to Inflation |
| 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 |
| Filing Status | Full Contribution | Contribution Phased Out | No Contributions |
| Single Filers | $122,000 | $122,000 - $137,000 | $137,000 or more |
| Joint Filers | $193,000 | $193,000 - $203,000 | $203,000 or more |
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:
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.
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.
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:
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.
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:
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