What is a Roth IRA – A Roth IRA (Individual Retirement Account) is a retirement savings account that allows you to pay taxes on the money you put into it upfront. The growth in your Roth IRA and any withdrawals you make after age 59 1/2 are tax-free, as long as you’ve had the account for more than five years.
Because you pay taxes on the front end with a Roth IRA, you don’t owe them in retirement. If you want to contribute to a Roth IRA, you must open and maintain it outside of your employer-sponsored retirement savings plan.
What Are the Benefits of a Roth IRA?
When you make contributions post-tax, that means you’ve already paid taxes on the money you set aside for retirement. That helps your retirement savings go a lot further! Here’s why:
- The money you invest in your Roth IRA grows tax-free.
- You won’t owe taxes when you withdraw your money in retirement.
So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when you withdraw that money in retirement! That’s a huge perk, especially for folks who expect to be in a higher tax bracket when they retire.
Here are a few more benefits of a Roth IRA:
- You’re not required to take distributions at a certain age, unlike the traditional IRA (which requires withdrawals beginning at age 70 1/2).
- You can keep contributing to your Roth IRA if you choose to work past retirement age, as long as your income still falls within the income limits.
- You can choose beneficiaries to inherit your account, and they will be able to withdraw funds tax-free as well.
Who Is Eligible for a Roth IRA?
You’re eligible if you report income on your tax return, however, you can’t contribute more than you make. There are no age restrictions with Roth IRAs. As long as you’re earning income, you can contribute—even after age 70 1/2, unlike a traditional IRA.
What are the 2020 Contribution Limits?
For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than:
- $6,000 ($7,000 if you’re age 50 or older), or
- your taxable compensation for the year, if your compensation was less than this dollar limit.
Roth IRA Income Restrictions?
Income Restrictions If Single
According to the Internal Revenue Service, single tax filers must have a modified adjusted gross income (AGI) of less than $122,000 to contribute the maximum amount of $6,000 ($7,000 if age 50 or older) to a Roth IRA.3
What if you make more than $122,000? If your AGI is between $122,000 and $137,000, you can still contribute, but it must be a reduced amount. Once you’re making more than $137,000 as a single filer, you aren’t eligible to contribute to a Roth IRA.
Income Restrictions If Married Filing Jointly
Married couples filing jointly must have a modified AGI of less than $193,000 to be able to contribute up to the limit for a Roth IRA. After that, you may qualify to make reduced contributions if your AGI is between $193,000 and $203,000.
If you have an AGI of $203,000 or higher, you’re not eligible to make Roth IRA contributions.
Can I Set Up a Roth IRA for My Spouse Who Doesn’t Work?
Yes. If you file a joint income tax return and have a taxable income, you can both contribute to your own separate Roth IRAs. But the IRS income-eligibility limits still apply.
Let’s say you make $75,000 and your wife stays home with their kids. You can each contribute the maximum amount of $6,000 for a total of two accounts. However, if you make $10,000 a year and contribute the max amount of $6,000 to your IRA, your nonworking spouse can only contribute $4,000 because they can’t contribute more than their earned income amount.
How Do I Set Up a Roth IRA?
Opening a Roth IRA can be as simple as visiting your bank’s website and filling out an online application. If your bank doesn’t offer Roth IRA accounts, you can open one with a brokerage firm. Most large firms also offer online access to start the account application. Here’s what you should have on hand in order to open your account:
- Your driver’s license or another form of photo identification
- Your Social Security number
- Your bank’s routing number and your checking or savings account number
- Your employer’s name and address
As part of the process of opening a Roth IRA, you’ll also choose a beneficiary (or beneficiaries) who could inherit your account. You’ll need their name, Social Security number, and date of birth.
Next, you can make your initial deposit and/or set up automatic contributions. You’ll be able to open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month. You can actually do both as long as you don’t exceed the contribution limit for that year.
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