This article was orginally published on November 14, 2017.
A Roth IRA is an individual retirement account that exhibits many similarities to a traditional IRA, however, the tax benefits of a Roth IRA are backloaded rather than frontloaded. Roth IRAs are funded with after-tax income; contributions are not deductible on an income tax return. With Roth IRAs, earnings grow tax-free and all future qualified distributions are tax-free. Recently, it has been publicized that investor Peter Thiel was able to turn $2,000 into $5,000,000,000 by utilizing the powerful investment vehicle of a Roth IRA. Previously, Mitt Romney was publicized for using a similar strategy.
Besides tax-free income in retirement, additional benefits of Roth IRAs are:
In 2021, individuals can contribute up to $6,000 ($7,000 if 50 years of age, or older) to a Roth IRA subject to the following income limitations:
|2021 Roth IRA Income and Contribution Limits|
|Filing Status||MAGI||Contribution Limit|
|Married filing jointly||Less than $198,000||$6,000 ($7,000)|
|$198,000 to $208,000||Begin to phase out|
|$208,000 or more||Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)|
|Married filing separately||Less than $10,000||Begin to phase out|
|$10,000 or more||Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)|
|Single||Less than $125,000||$6,000 ($7,000)|
|$125,000 to $140,000||Begin to phase out|
|$140,000 or more||Ineligible for a direct Roth IRA (learn more about a “Backdoor Roth IRA”)|
If an individual is unable to directly contribute to a Roth IRA due to income limitations, he or she can indirectly contribute by utilizing a “Backdoor Roth IRA”. Backdoor Roth IRAs consists of making traditional IRA contributions and rolling these amounts to a Roth IRA. Please be aware under IRC Sec. 408(d)(2), the taxpayer’s IRAs are combined and therefore, may be a taxable event upon conversion.
In addition, married individuals without income can use their spouse’s income to contribute to a Roth IRA by taking advantage of the Spousal IRA rules.
Roth IRAs can provide significant tax benefits for:
On December 20, 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. Ordinarily non-eligible designated beneficiaries of inherited IRA’s who are not taking life expectancy payments have a 5 year or 10 year window to withdrawal all of the account’s funds. The 5-year rule generally applies to beneficiaries if the owner died before 2020. The 10-year rule applies to beneficiaries if the owner died after 2019. These rules are complex and different for eligible designated beneficiaries.
Author: Evan Finer | firstname.lastname@example.org