A Roth IRA can be an effective tool for those who don’t qualify for tax-deductible contributions to a traditional IRA. This is because contributions to a Roth IRA are not tax-deductible and only after-tax dollars can be invested into a Roth IRA. Depending on a person’s personal goals and circumstances, a Roth IRA can be an effective savings tool, and can be a great option for individuals looking to minimize taxes during their retirement, while also preserving assets for their beneficiaries.
The requirements for setting up a Roth IRA are very different from those needed to set up a traditional IRA. As such, many individuals aren’t able to contribute to Roth IRAs or don’t qualify to take full advantage of them. Taxable compensation is required, and if that compensation is at least $5,500 during the year, individuals may be able to contribute the full amount of that compensation. However, a person’s ability to contribute to a Roth IRA in any given year is based on his or her Modified Adjusted Gross Income and income tax filing status, which means the allowable contribution could be less than the maximum, or nothing at all.
While Roth IRA contributions aren’t tax-deductible, withdrawals from Roth IRAs are totally free from federal income tax. To enjoy tax-free distributions, individuals must meet a five-year hold period requirement, and have reached age 59 ½ at the time of the withdrawal; made a withdrawal due to disability; made a withdrawal to pay for first-time homebuyer expenses; or have a withdrawal made by a beneficiary or estate following death.
In addition to qualifying Roth IRA distributions being tax-free, they also don’t come with the 10% early withdrawal penalties that traditional IRA withdrawals carry.
With Roth IRAs, there are also no required distributions after age 70 ½, or at any time. Roth IRAs give individuals the ability to decide when, or if, they want to withdrawal funds. Additionally, individuals can continue to contribute to their Roth IRAs after age 70 ½, as long they have taxable income and remained qualified.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.