Roth IRA

What is a Roth IRA?

A Roth IRA is a personal retirement plan into which eligible participants can make after-tax contributions. The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997. A benefit of a Roth IRA is that an owner may take distributions from it tax free, provided that the account is at least five years old and the account holder is 59½ or older.

Am I eligible to set up a Roth IRA?

2019 Maximum Roth IRA Contribution – $6,000 if under the age of 50. (Increased by $500 since 2018) If over the age of 50, eligible to make an additional $1,000.00 in catch up contributions (Remains unchanged). You may make the maximum Roth contribution provided that your Adjusted Gross Income (AGI) does not exceed the low end of the following ranges:

How do you contribute to a Roth IRA?

Your contributions towards a Roth IRA are limited by your income level. Contributions can made if you have a taxable income and your modified adjusted gross income is either:

  • less than $203,000 if you are married filing jointly.
  • less than $137,000 if you are single, head of household, or married filing separately (if you did not live with your spouse at any time during the previous year).
  • less than $10,000 if you’re married filing separately and you lived with your spouse at any time during the previous year.

As an example, assume a married individual filing a joint tax return with an AGI of $190,000. In this situation, the individual would be eligible to make a full contribution to a Roth IRA (see chart below to determine contribution limits). If the individual’s AGI was $200,000, only a partial contribution would be allowed. If the individual’s AGI was $205,000, no Roth contribution would be permitted.

Unlike the Traditional IRA, there are no limitations based on whether you are an active participant in an employer-sponsored plan. Also, contrary to a Traditional IRA, contributions may be made beyond age 701/2 provided you still have earned income.

Roth IRA Contribution Limits (Tax year 2019)

How Much Can Be Contributed to a Roth IRA?

You may contribute the lesser of 100% of income or the maximum contribution allowed in the corresponding tax year. See the chart below for the maximum aggregate contribution allowed for all IRAs during the tax year:

Additionally, if you are age 50 or older for the tax year of the contribution, an additional catch-up amount can be contributed. This catch-up option allows an additional $6,000 to be contributed during the tax year.

As a working spouse, you may also contribute to a Roth IRA on behalf of your non-working spouse provided you file a joint tax return and your Adjusted Gross Income doesn’t exceed the limitations set forth above.

When Can I Take Money Out of My Roth IRA?

You can begin making qualified withdrawals from your Roth IRA at 59 ½ years old and at least five years have passed since you began contributing. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 ½, unless it’s for a qualifying reason such as medical expenses, college expenses, first time home buying, or paying for sudden disability.

Traditional IRA’s require that you take minimum withdraws at age 70 ½. One of the great benefits of a Roth IRA is that you have no mandatory withdrawal requirements so you can leave your money in your Roth IRA and allow it to grow for as long as you like.

What are the Restrictions on a Roth IRA Distribution?

As a Roth IRA owner, you may withdraw Roth funds at any time. In order to enjoy one of the primary benefits of a Roth IRA, the withdrawal must be a “qualified distribution.” If so, the funds (including any interest earned) may be withdrawn tax-free and the 10% penalty tax will not apply. In order to be considered a “qualified distribution,” the distribution must be after the fifth taxable year after the first taxable year you made a regular (non-rollover) contribution and one of the following conditions must also be met:

Payment or Distribution is Made:

  • On or after the date you reach age 59 ½
  • To a beneficiary or to your estate after your death
  • Because you are disabled
  • As a Qualified special-purpose first-time homebuyer distribution ($10,000 limit)

Can You Transfer/Rollover Existing Retirement Accounts to a Roth IRA?

Yes, you may transfer existing Roth IRA funds to another Roth IRA. Beginning in 2008, proceeds of other types of retirement accounts can be transferred/rolled directly into a Roth IRA. Since most other types of retirement accounts consist of pre-tax money, the money would be converted into a Roth IRA. Please consult your tax advisor for eligibility requirements and other details concerning Roth IRA conversions. Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it’s important that you understand your options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees and any potential penalties.