Roth IRAs

A man calculatingA Roth IRA is a type of Individual Retirement Account you make contributions to with after-tax dollars, i.e., the money you contribute is taxed before the contributions are made. Unlike a Traditional IRA, your Roth contributions are never tax deductible, but withdrawals are free of federal taxes if you meet certain requirements (also called a “qualified distribution”).

Contribution limits

To be eligible for a Roth IRA contribution, you must have earned income for the year that's at least equal to the IRA contribution amount.

If you're eligible to invest in a Roth IRA, the contribution limit for the 2014 tax year is $5,500 or $6,500 if you're age 50 or older. 

Unlike with Traditional IRAs, you can contribute to a Roth IRA after age 70½ (provided you have earned income that's at least equal to the IRA contribution amount).

Withdrawal rules

Because you make Roth contributions with after-tax money, you can withdraw your original contributions at any age, free of federal taxes and penalties. You can also withdraw your earnings federal tax free and penalty tax free, if you’ve had the IRA for five years and meet one of the following conditions:

  • You've reached age 59½
  • You're using the funds for a qualified first-time home purchase (up to a $10,000 lifetime maximum)
  • You become disabled
  • You die (If you've had the Roth IRA for five years or more and you pass away, your beneficiaries will not owe income tax on withdrawals from the IRA, although they may be subject to estate tax.)

Any withdrawal that does not meet these conditions will generally be subject to a 10% IRS early withdrawal penalty.

Exceptions to the early withdrawal penalty

The IRS may waive the 10% IRS early withdrawal penalty if distributions are used for:

  • Certain unreimbursed medical expenses
  • Medical insurance, providing certain conditions are met
  • A disability, if certain conditions are met
  • Payments received under a Substantially Equal Periodic Payment Plan over a five-year period or until age 59½ (whichever is longer)
  • Qualified higher education expenses
  • Qualified reservist distributions

Note that the 10% penalty tax generally does not apply to distributions to Roth IRA beneficiaries (although this penalty may apply to spouse beneficiaries who choose to treat the inherited Roth IRA as their own).

Unlike with Traditional IRAs, Roth IRA owners do not need to take minimum distributions once they reach age 70½.

Is a Roth IRA a good fit for you?

A Roth IRA may be right for you if you:

  • Meet the eligibility requirements
  • Believe you may be in a higher tax bracket when you withdraw the money
  • Want the ability to withdraw your original contributions before retirement
  • Need to draw from retirement savings for education costs or a first home
  • Want to use your retirement savings for estate planning.
  • Are 70½ or older and want to continue investing in an IRA

Anyone can convert retirement savings to a Roth IRA, which may give you an opportunity for significant long-term savings in taxes. However, converting retirement savings in a pre-tax plan or Traditional IRA will create a taxable event on your tax return for the year of the conversion. Be sure to speak with an advisor or your tax planner to determine your best course of action for planning purposes.

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