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Roth IRA Rules

So you’re interested in a Roth IRA? In that case, there are some important rules you should know about as you plan for retirement. One of the reasons people love Roth IRAs is that they come without some of the requirements attached to traditional IRAs. That doesn’t mean that anything goes, however. The IRS still has rules and requirements. Here’s what you need to know about Roth IRAs.

Let’s review the basics of the Roth IRA. Unlike a traditional IRA, when you open a Roth IRA it is funded with after-tax dollars. You can’t deduct your Roth IRA contributions from your taxable income. What’s the big deal, you ask? The big deal is that your after-tax contributions grow and compound over time. Then, when you decide to retire to a life of leisure, you can make tax-free withdrawals.

Here are the Roth IRA rules:

You Can Withdraw Money Before Retirement

All About Roth IRA Rules

With a traditional IRA, you’ll pay a penalty if you take withdrawals before you hit age 59.5. With a Roth IRA, though, you can withdraw your contributions at any time, without paying a penalty. Keep in mind that you can only withdraw up to the amount you contributed – you can’t withdraw earnings until you hit 59.5. That means you’ll need to keep track of how much you contribute to your Roth account, or risk withdrawing too much and paying for it.

You Can Withdraw Money in Retirement Without Paying Income Taxes

Since the money you contribute to your Roth IRA is after-tax money, you don’t have to pay taxes again when you start taking distributions from the account in retirement, provided you have had the Roth IRA for at least 5 years and have hit age 59.5. Tax-free withdrawal makes the Roth a great way to diversify your tax risk in retirement.

If you have a 401(k) through work, you’ll pay taxes on that money when you start taking distributions in retirement. Opening a Roth on the side will give you a mix of taxed and un-taxed income in your golden years. The younger you are when you open your Roth IRA, the more you stand to gain. You’ll benefit from the magic of compound interest, and from more years of gains that are never taxed.

You Can’t Contribute While Rich

Yes, there are income caps on Roth IRAs. The IRS income eligibility range tells you whether you can make a) the maximum contribution to a Roth IRA ($5,500 in 2017), b) a partial contribution or c) no contribution.

For 2017, the phase-out income range for a married couple filing together is $186,000-$196,000. For those filing on their own, the range is $118,000 to $133,000. If your income is below the bottom of the range, you can contribute the full $5,500. If your income falls within the range, you are subject to contribution phase-out rules, meaning that you won’t be able to contribute the full $5,500, but can contribute a partial amount. If your income is above the top of the phase-out range, IRS rules prohibit you from contributing to a Roth IRA.

You Can Open a Backdoor Roth

Let’s say your income limits make you ineligible for a Roth (more on that to follow). You can still take advantage of what’s called a backdoor Roth. With a backdoor Roth, you contribute to a nondeductible traditional IRA and then roll it over into a Roth IRA. Ta-da! You have a Roth, and all the tax advantages that come with it. 

You Can’t Contribute Over the Limit

All About Roth IRA Rules

Keep an eye on Roth IRA contribution limits, currently at $5,500. If you want more Roth action in your life but you’ve hit the Roth IRA contribution limit, consider contributing to a Roth 401(k).

You Don’t Have to Take Required Minimum Distributions

Traditional IRAs come with Required Minimum Distributions (RMDs). That means that when owners of traditional IRAs hit age 70.5, they’re required to start taking money out of their account, even if they don’t need that money and don’t feel like paying taxes on that money. Not so with the Roth IRA, which doesn’t have any RMDs.

You Don’t Have to Stop Contributing After Age 70.5

With a traditional IRA, you have to stop making contributions at age 70.5. Roth IRAs come with no such rules. You can contribute to them for as long as you live, making them valuable assets for folks who want to build up wealth to transfer to their heirs.

The Takeaway

The Roth IRA can be a great retirement savings option for anyone who wants to reduce his or her tax burden in retirement and benefit from years of tax-free growth in the meantime. If you think you’ll be in a higher tax bracket in retirement than you are now, saving in a Roth can be a particularly smart move. Not sure how your tax bracket will compare in retirement? We get it. No one can predict with 100% certainty what tax policy changes lie ahead. So why not hedge your bets with a Roth?

Tips for Saving for Retirement

  • Max out your employer match. If your employer will match a portion of your 401(k) contributions, make sure you’re taking full advantage. With that additional boost, your 401(k) balance will grow even larger over time.
  • Work with a financial advisor. According to industry experts, people who work with a financial advisor are twice as likely to be on track to meet their retirement goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: flickr ,©iStock.com/annebaek, ©iStock.com/Jason York

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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