What Is A Roth IRA?

A Roth IRA is a special savings plan authorized by the Federal government to help you accumulate funds for your retirement. Contributions are nondeductible but all withdrawals, including earnings, are tax-free if the account has been open for five years and the account holder is 59½ or older.

Who Is Eligible To Contribute To A Roth IRA?

There are two requirements for eligibility to make regular tax-year contributions to a Roth IRA:

  • you must have compensation (or your spouse must have compensation).
  • your MAGI for any tax year cannot exceed certain prescribed limits. 
  • These limits are subject to annual cost-of-living adjustments (COLAs).

How Much Can I Contribute To A Roth IRA?

An individual can contribute up to a limit set by the Federal government.  See our chart on the Retirement Accounts page.

I Am An Active Participant In An Employer-Sponsored Retirement Plan. May I Contribute To A Roth IRA?

The fact that you participate in an employer-sponsored retirement plan does not exclude you from making a non-deductible contribution to a Roth IRA.

Are Interest And Dividend Earnings Tax-Deferred?

All the earnings you accumulate in your Roth IRA remain tax sheltered.  Earnings can be withdrawn tax-free. If certain criteria is met to enjoy tax-free and penalty-free distributions.

Must I Contribute The Full Amount Each Year?

No. You can contribute any amount your budget allows, either in one or more contributions. In fact, if you choose, you need not make any contributions in a given year.

When Can I Make Withdrawals?

Penalty-free and tax-free withdrawals of your contributions are permitted at any time (until total distributions from all Roth IRAs exceed the contribution amount – no distribution is subject to either taxation or penalty). Tax-free withdrawals of earning are permitted after age 59½, in the event of death or total disability, or as a qualified first-time home buyer (up to $10,000). In order to be tax-free, earnings must have remained in the account for a five-year period beginning with the first taxable year for which a contribution was made. There is no mandatory age requirement for distributions and funds may remain in the account during the account owner’s lifetime.

Is There A Penalty For Early Withdrawals?

There could be a 10% penalty for withdrawing all or any part of the earnings. Taxable distributions are not subject to the 10% early withdrawal penalty if the individual is 59½, deceased, disabled, or if taking equal periodic payments over his or her life expectancy for at least five years or until age 59½, whichever comes later, or for college expenses, first-time home purchase up to $10,000, certain medical expenses, and certain other uses.

When Are Taxes Paid On Roth IRAs?

Taxes are never paid on the original contributions which are not tax deductible in the year of your contribution. Taxes may have to be paid on withdrawals of earnings which have not met the five year holding period. (For example, if a taxpayer’s first contribution is made for tax year 2002, 2002 is the first taxable year, and 2006 is the fifth taxable year.)

Can A Traditional IRA Be Converted To A Roth IRA?

Yes, a Traditional IRA can be converted to a Roth IRA.

Can Funds Be Rolled Over From One Roth IRA To Another Roth IRA?

Yes, you may transfer or rollover from one Roth IRA to another Roth IRA tax-free and regardless of your adjusted gross income. Rollovers from one Roth IRA to another Roth IRA are limited to one time per year tax-free.

If I Contribute To A Roth IRA, Will It Affect The Amount That I Can Contribute To My Employer-Sponsored Retirement Plan?

No. The amount you contribute to your employer-sponsored plan will not be affected by your Roth IRA contribution.

Can My Roth IRA Be Inherited?

Yes. When you die, the entire proceeds can be passed on tax-free to your beneficiaries, providing your Roth IRA meets the five-year test.

What Is the Deadline For Contributing to a Roth IRA?

You can open or make contributions to your Roth IRA any time up to and including the due date of your tax return for the previous tax year, normally April 15th.

Important Note

The information contained on this website is not intended to provide specific advice or recommendations for any individual. We suggest that you consult your attorney, accountant, tax or financial adviser with regard to your personal situation.

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