WHAT IS THE ROTH IRA?
The Roth IRA is an Individual Retirement Account that allows you to invest after-tax dollars that grow tax-free with tax-free withdrawals in retirement. It is one of the most powerful investment accounts available.
WHO CAN GET A ROTH IRA?
Any U.S. Citizen 18 or older can qualify for one as long as they earn income. You can even open a Joint Roth IRA with your spouse. There are income limitations. If you make too much money, you cannot contribute to a Roth IRA. See the “Income Limits” heading below. You can choose to open a Roth IRA with any brokerage that offers one. If you want to be hands off and automated, I recommend Betterment or Wealthfront. If you want complete control in what you invest in, I recommend M1 Finance.
WHAT ARE THE CONTRIBUTION LIMITS?
- The 2022 Contribution Limit is $6,000. You have until April 15th, 2023 (Tax Day) to maximize your contributions for 2022.
- The 2023 Contribution Limit is $6,500.
- If you are 50 or older, you can contribute an additional $1,000 as a “catch-up” contribution.
- Your Contribution Limit can be restricted if you make too much money. See “Income Limits” below.
- There is no age limit for contributions as long as you earn income.
- Contribution Limits are not affected by rollovers.
- If you exceed the contribution limits, you will be charged 6% in taxes each year until you fix the overage.
WHEN CAN I WITHDRAW MY FUNDS?
- You can withdraw your “contributions” at any time.
- You can withdraw your “earnings” after holding a Roth IRA account for 5 tax years, but will incur a 10% penalty.
- You can withdraw your “earnings” for any reason penalty-free at 591/2 years old.
- If you withdraw earnings before 591/2, will incur a 10% penalty fee on your withdrawals.
- If needed, you can withdraw up to $10,000 of your earnings at ANY time to pay for your first home, health insurance premiums, unemployment costs, medical expenses that exceed 10% of your adjusted gross income, or higher education for you or your direct family members.
- There are no minimum required distributions when you retire. You can keep your money in your Roth IRA for as long as you live.
WHAT ARE THE INCOME LIMITS?
To contribute to a Roth IRA, you need to earn at least the amount you contribute. For example, if you retire and only make $1000 per year, you cannot contribute more than $1,000 per year to your Roth IRA.
| 2023 Tax Filing Status | Your Modified AGI | Contribution Limit |
|---|---|---|
| married filing jointly or qualifying widow(er) | < $218,000 | Max Limit |
| married filing jointly or qualifying widow(er) | > $218,000 but < $228,000 | Reduced Limit |
| married filing jointly or qualifying widow(er) | > $228,000 | $0 |
| married filing separately and you lived with your spouse at any time during the year | < $10,000 | Reduced Limit |
| married filing separately and you lived with your spouse at any time during the year | > $10,000 | $0 |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $138,000 | Max Limit |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $138,000 but < $153,000 | Reduced Limit |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $153,000 | $0 |
| 2022 Tax Filing Status | Your Modified AGI | Contribution Limit |
|---|---|---|
| married filing jointly or qualifying widow(er) | < $204,000 | Max Limit |
| married filing jointly or qualifying widow(er) | > $204,000 but < $214,000 | Reduced Limit |
| married filing jointly or qualifying widow(er) | > $214,000 | $0 |
| married filing separately and you lived with your spouse at any time during the year | < $10,000 | Reduced Limit |
| married filing separately and you lived with your spouse at any time during the year | > $10,000 | $0 |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $129,000 | Max Limit |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $129,000 but < $144,000 | Reduced Limit |
| single, head of household, or married filing separately and you did not live with your spouse at any time during the year | > $144,000 | $0 |
HOW MUCH OF MY CONTRIBUTIONS ARE TAX-DEDUCTIBLE?
The Roth IRA is NOT Tax-Deductible. However your earnings and contributions can be withdrawn tax-free.
CAN YOU HAVE BENEFICIARIES?
Roth IRA’s are one of the best retirement accounts for beneficiaries. If you want to set your child or spouse as a beneficiary, they will get your Roth IRA after you pass away and they will be able to withdraw your contributions and earnings tax-free and penalty-free as long as you held the account for five tax years when you were alive.
- Roth IRA “Beneficiaries” have to take minimum required distributions.
- As the beneficiary, a full payout must be completed within 10 years of the original account holder’s death, or you can take a distribution every year for 5 years. If you don’t deplete the IRA by December 31st of that fifth year, you will have to pay a 50% penalty on the remaining balance. This is a relatively new law that was passed under the 2019 SECURE Act and it only applies to beneficiaries who received the Roth IRA in 2020 or later.
ADVANTAGES & DISADVANTAGES
| Advantages | Disadvantages |
|---|---|
| You can withdraw your contributions (not earnings) tax-free and penalty-free after holding a Roth IRA for at least 5 tax years. | Income limitations in contributing to a Roth IRA. $138,000-$153,000 if single and $218,000-$228,000 if married filing jointly. |
| Enjoy tax-free growth and withdrawals in retirement. | Not Tax-Deductible. |
| No contribution age limit. You can still contribute when you’re 80 if you are still working and making at least $6,000 per year. | As of 2023, You can only contribute $6,500 per year ($7,500 if you are over 50) |
| No minimum required distributions when you retire. You can choose to keep your money in a Roth IRA for as long as you are alive without paying any fees. | |
| You can pass your ROTH IRA down to your children. Beneficiaries of Roth IRA’s won’t owe any taxes on their distributions. | |
| You can withdraw up to $10,000 of your earnings ANY time to pay for your first home, health insurance premiums, unemployment costs, and certain medical expenses. |
THE MEGA BACKDOOR ROTH CONVERSION
If you make too much money, you will be limited in how much you can contribute to the Roth IRA. You may not be allowed to contribute anything at all. There is a legal way around both the contribution limits and the income limits through the Mega Backdoor Roth Conversion.
Rollovers do not count towards the contribution or income limits of your accounts, however there are rollover limits. There are two ways you can rollover money into a Roth IRA through the Mega Backdoor Roth Conversion. This method allows you to use the higher limits of the 401(k) to contribute after-tax dollars, then roll them over into your Roth IRA. There are two ways to rollover your funds.
- Immediate Rollovers into Roth IRA – If you decide to contribute 10% after-tax dollars into your 401k, you can rollover the full 10% contribution into your Roth IRA on the day you receive my paycheck. This allows you to minimize or eliminate the need to pay taxes on your earnings. If you wait a day or a week then your contributions would have likely earned some pre-tax money. Fidelity makes this rollover strategy easy with their app.
- Tax-Deferred Rollover into Traditional AND Roth IRA – You can choose to rollover your after-tax 401k contributions into a Roth IRA, then rollover my 401k pre-tax earnings into your Traditional IRA account where everything is already tax-deferred.
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