Ins and Outs of a Roth IRA
Opening a Roth IRA
Open a Roth IRA at a financial institution of your choice at any time. The account must be designated as a Roth IRA upon opening. You may have as many Roth IRAs as you want, but the annual contribution limit applies to all of the accounts collectively.
You can typically contribute money to a Roth IRA for a particular tax year until April 15 of the following year. Contribution to this type of retirement account may not exceed your taxable compensation for a particular year. Most people can contribute up to $5,500 to a Roth IRA in one year. Investors over age 50 can contribute up to $6,500 annually. Contribution limits are reduced for those earning more than $181,000 if filing jointly, or $114,000 for single or head of household statuses; higher earners may be excluded from contributing entirely. Include contributions as part of your income for the year, as contributions to a Roth IRA are not tax-deductible.
Because the IRS taxes contributions to a Roth IRA, distributions made later in life are not subject to income taxes. You must meet a five-year holding period requirement to avoid penalties. While contributions to a Roth IRA may be withdrawn at any time, earnings must be part of a qualified distribution to avoid penalties. Some examples of qualified distributions include those made because you are disabled or to cover the expenses related to the purchase of a first home up to $10,000. Inform your financial institution when you wish to receive a distribution.
A non-qualified distribution of the earnings in a Roth IRA is subject to a 10 percent penalty and may be subject to income taxes. Penalties generally occur on withdrawals of earnings before you turn 59 1/2 and before the mandatory five-year holding period elapses. For example, if you contribute $5,000 to a Roth IRA that contains $7,500 total and you distribute the total amount at age 57, you incur a 10 percent penalty and ordinary taxes on the earned $2,500.
Contributions and Distributions After 70
Unlike traditional IRAs, you can contribute money to a Roth IRA at any time in your life, even after you reach age 70. When you reach 70, the IRS does not require you to take distributions out of a Roth IRA account.
Investors can add money to a special individual retirement account known as a Roth IRA to save for retirement later in life. Roth IRAs follow the same basic rules as traditional IRAs with a few exceptions. Specific rules governing how a Roth IRA works include limits on contributions and penalties on early distributions.
Although you pay taxes on amounts you contribute, a Roth IRA avoids taxes on distributions after you retire. Talk to your financial adviser to see if a Roth IRA represents a good choice for your investment dollars.