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Contributing to a Roth IRA: What to Know

This article was orginally published on November 14, 2017.

Advantages of Roth IRA’s

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:

  • Contributions can be withdrawn at any time, tax-free and penalty-free.
  • Individuals can contribute to Roth IRAs after age 70 ½.
  • No required minimum distributions and therefore, investors can avoid selling assets on a market downturn.

Income Limitations

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”)

More Than One Way To Contribute

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.

Benefits Of A Roth For Each Individual

Roth IRAs can provide significant tax benefits for:

  • Younger, lower-income individuals who will not lose upfront tax deductions and will benefit from tax-free, compounded growth.
  • Older, wealthier individuals who want to leave assets to their heirs tax-free.
  • All individuals, especially those already maximizing employer provided retirement account matches, who want to save additional funds for retirement or want to limit taxes during retirement.

Updates for the SECURE Act  

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 | efiner@withum.com

If you have any questions, or would like additional information regarding Roth IRAs, or any other retirement accounts please contact a member of our Private Client Service Group.

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