7 Things You MUST Know About the Roth IRA for 2014

Does your Roth IRA measure up?

When you’re at the point in your life where you are adding to your Roth IRA in order to help plan for a stable and enjoyable retirement, it makes sense to have all of the current information regarding the current IRS regulations concerning the Roth.

Plus, you want to have a grasp of the current IRA rules for a given year. At this point, people are looking forward to 2014.

In some cases, you might have taken the maximum contribution amount into your Roth for 2013 and you’re thinking about saving for next year’s contribution.

Perhaps, you’ve got your eye on the tax season. No matter what, you want to know enough before you start making decisions about your IRA. Here’s a look at the Roth IRA rules for 2014.

As has been expected are some differences in the rules from the previous year.

The IRS has revealed it current Roth IRA rules. This data was based on a variety of factors and figures including inflation statistics to come up with new limits for the contributions.

Need to open a Roth IRA? Check out our recap on the best places to open a Roth IRA and the best online stock broker sign up bonuses.

1 Contribution Limits Have Finally Increased

Standard Roth IRA contribution limits have increased by $500 to $5,500. Those plan participants over 50 years of age have a limit of $6,500, referred to as the “catch up contribution”.

Contribution Year49 and Under50 and Over (Catch Up)
2009$5,000$6,000
2010$5,000$6,000
2011$5,000$6,000
2012$5,000$6,000
2013$5,500$6,500
2014$5.500$6,500

2 Roth IRA Phaseout Limits Have Increased

There are some other details released in the 2014 Roth IRA rules.

For instance, the AGI phase-out range for tax payers making contributions to their Roth’s is between $181,000 and $191,000 for jointly filing couples, a $3,000 increase from 2013.

The same increase is true for singles filing. The range is $114,000 to $129,000. Married individual who file separately and have been actively participating in an employer-sponsored retirement plan should see no changes in the phase-out range. It stayed the same as the previous year: $0 to $10,000.

3 Direct 401k Rollovers Into Roth IRA’s is S-I-M-P-L-E

Another rule that remained the same but still offers more opportunity than was available prior to 2010 concerns direct rollovers for 401(k) to a Roth IRA.

The process used to require you to open a traditional IRA account, then rollover your 401(k) into it, and end by opening a Roth account and converting the traditional IRA into a Roth.

In 2010, this changed by skipping a step, letting you convert it directly from the 401(k) to a Roth IRA. It’s less of pain and there is certainly less unnecessary paperwork.

Learn about all the rules of rolling over your 401k into a Roth IRA.

4 Roth IRA Conversions Continue

In 2014, the rules are the same as 2010. except that there is no two year deferral option to report the income. Whatever is converted in 2014 must be reported in 2014, along with any amounts that must be reported as half of a 2010 conversion. The income limits disappeared permanently after 2009.

Want more information on the Roth IRA Conversion? You can see more on the conversion tax rules regarding after tax contributions.

5 “Take Back” Still in Effect (IRA Recharacterization)

If you initiate a Roth IRA conversion and then decide it wasn’t the best idea, you’re in luck. You’re allowed a “take back” in the form of a recharacterization. The recharacterization deadline is 10/15 of the following year. If you did the Roth IRA conversion in 2013, you would have until 10/15/2014.

6 *NEWER RULE* Roth Conversions from Your Existing 401k

This was released last September in the Small Business Tax bill.

First things first, if you are still working, are at 59.5 in age, and your plan allows it, you can do what’s called an in-service distribution with your 401k into a IRA. Once you reach the IRA, you then, of course, can do the conversion. What you might not know is that some plans allow you to take out certain “parts” of your 401k balance.

The key here is “parts“. You still aren’t able to distribute your entire 401k balance to then do a conversion. Where the rules change a bit is regarding the employer profit sharing and employer contributions. These two type of contributions are available for the in-service distribution provided they meet this criteria:

1. The money has been in there for at least 2 years. 2. You, the employee, has been in the plan for at least 5 years; or you’ve reached an age that has been satisfied according to your plan documents.

Please note: if you have rolled over an IRA or old 401k into your current 401k or you have contributed after-tax contributions, those will be allowed for an in-service distribution. This is providing the plan document allows it.

7 Can’t Convert to Roth IRA…What About Roth 401k?

If don’t qualify for the in-service distribution, don’t give up quite yet. The IRS just recently released guidance about the possibility to convert your 401k to a Roth 401k. One requirement for you to be able to do this is that you must have a Roth 401k option with your current plan.

No Roth 401k option = no conversion.

Another important consideration: Unlike the Roth IRA conversion, there is NOT an option to recharacterize with a conversion to a Roth 401k.

The key to all this is dependent on your 401k plan – they are all different. The best thing to do is to check with your HR department to see if any of these options are available. Here’s another piece of advice, if your employer doesn’t offer it – stay on them. A little bit of pressure and persistence never hurts.

Benefits people wanted this option to allow plans to retain assets that otherwise would be distributed out of the plans for Roth IRA conversions. Here is the IRS release on these conversions: http://www.irs.gov/pub/irs-drop/n-10-84.pdf.

Does it Apply to 403b’s?

If you’ll look into the IRS publication, you will see that the in-service Roth IRA conversions can also apply to 403b’s. Once again: double check with your plan administrator. Notice a theme here?

Best Roth IRA Account Options

There are many brokerage firm options for you to open a Roth IRA with, but which one is best?

Each broker is going to have different strengths depending on your investing experience and goals.

The new investor that is just getting started would be well served by ShareBuilder. The experienced trader would need the tools of E*TRADE or TD Ameritrade.

It all depends on your situation.

We maintain two Roth IRA resources for readers:

Scottrade

ScottradeScottrade is one of our favorite brokers thanks to their low trading costs, excellent online interface, and 500+ branch locations across the country that you can walk into for help.

Even though Scottrade doesn’t offer a sign up bonus for opening a Roth IRA, we still love this brokerage firm. (And if you are just starting out investing you probably don’t have $10,000 to $25,000 needed to get really big brokerage sign up bonuses.)

ShareBuilder
For those just starting out and trying to build up a great investing habit, ShareBuilder is one of the best brokerage firms to go with.
401k rollover into roth ira

Your trades are rock bottom priced at just $4 when you do automatic investing.

That automatic investing will, over time, help you build a large portfolio. You don’t have to have all of the money to invest today as long as you can commit to building up your funds over time.

ShareBuilder helps you do just that. The interface is simple, and if you can get a $100 bonus for signing up.

Don’t read a bunch of information and put off opening a Roth IRA. Your retirement can’t wait. Get started today and choose one of the above accounts to open your first Roth IRA. Not sure which account you want? Check out the best places to open Roth IRA and the best online stock broker sign up bonuses.

Sources:

  • Treas. Reg. § 1.401-1(b) (1)(ii) and Revenue Rulings 71-295 and 68-24
  • http://www.irs.gov/pub/irs-drop/n-10-84.pdf

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Comments | 34 Responses

  1. BernardoEstevez says

    Jeff: Thank you for the article/video. My wife and I actually did a traditional to Roth IRA conversation last year in order to be able to participate it. I’m glad you are spreading the word on this as I don’t see this tip publicized enough.

  2. Scott Grinas says

    It’s important to maximize your contribution limits if you can afford them. The amount of compounding interest is so significant I can’t think of a reason not to fund an account.

  3. bluesauger says

    Still, $5000 a year for roth IRA contributions ins’t very much. I don’t know how many people can really retire on such small yearly contributions.

    • GeezerGeek says

      If you started contributing $5,000 at age 25, continued contributing $5,000 until age 65, and your investments earned just 8%, by the time you were 65, you would have over $1.25 million in the account. Of course the annual contribution amount is indexed and could increase annually in increments of $500 but over a period of time, even $5,000 annual contributions are not chump change.

  4. Cecile Kaplan says

    I want to fund a Roth Ira for my granddaughter. She is currently in a Teach for America position in New Orleans. How can I do this?
    Thank you.

  5. Vincent says

    My kids are in college and are doing a paid summer intern. Can they open their Roth IRA? Please advise. thanks.

  6. Camille says

    My husband died in Apr 2012. I am the beneficiary of his 40lk and 2 Roths. Should I roll 401k into a Roth? (I have 2 Roths as well). Can I postpone any rollover into CY 2013 for tax purposes as I will have considerably less income that year on my own versus this year with his income. What are other and better options?

    • says

      @ Camille First, I’m sorry for your loss.

      Regarding your question, it’s really a tough one to answer without know more about your situation. A Roth IRA conversion is not black and white as there are so many factors that go into it.

      You sure can delay the conversion into any year that you want.

    • says

      @ Pat Yes and no. You still have to wait until 59.5 to pull the interest and earnings out of the Roth IRA, but you do have access to the principal at any time. There a 5 year exception if the Roth IRA was recently opened.

  7. Sean says

    Jeff, thanks for the info. My wife and I have set our goals for 2013 and starting our first Roth IRA was at the top. This helped a lot.

  8. Sandie says

    Just wondering what to do with some $$. I have a Roth IRA and a tradition IRA. I have a savings account, but I was thinking of putting it in my Roth. I have a retirement I live off , etc. Should I take the savings and convert it. If necessary, I can take it out for emergencies. I work part time and make about $10,000.

    I am 65 and a widow of 4 years.

    Just found your website. Thanks, Sandie

    • says

      @ Sandie For now I would just leave the money in cash or in an investment account. The IRA (Roth or Traditional) probably won’t give you any real tax benefit to take advantage of right now.

    • says

      @ Charlie If you are over the age of 70 1/2 and you convert a traditional IRA to a Roth, you’ll have to remove the RMD first and it will not be able to converted to the Roth.

  9. Marc says

    Hey Jeff,

    Not sure if you are still answering questions here, but I am still a little confused at the benefit of a Roth IRA over another vehicle. If I put money into a Roth I have a 5 year delay on being able to access it. I also have to wait till 59 to touch any interest made, however in a savings account the restrictions usually seem to be much less. I guess im looking for that single bullet.

    • says

      @ Marc

      Did you miss that tax-free earnings on any interest made?

      If you open a savings account, you have to pay tax on the earnings. If you open an investment account and buy a stock that pays dividends, if you have to pay tax on the dividends.

      If you open a Roth IRA and make any interest or dividends, you’ll never have to pay tax on any of it (if you leave it there until 59 1/2).

      How’s that for a single bullet?

  10. Bill says

    Jeff,

    Follow up question on the advice to Marc above.

    If some of the principal was pulled after 5 years from a Roth IRA, will this have any tax implications on the continued contributions and their interest/dividends beyond this point up till 59.5 yrs?

  11. Thomas says

    Hi Jeff,
    Can an individual max out there 401k ($17k) and also add $5k to there ROTH for 2012? However the total income is < 90K.
    Thanks.

  12. Mike says

    Hi Jeff,

    Thanks for your insight. Say you work on commision so you are unsure what your final MAGI will be. Through the year you contribute to your ROTH and at the end of the year you are over the $188k or whatever the limit may be. What will you have to do?

    Thanks!

    Mike

    • says

      @ Mike If you over contribute to a Roth IRA, you’ll just have to remove it. Check out IRS Form 590 for more details.

      If this does happen, just contact your IRA custodian and they’ll be able to correct it for you.

  13. Heather says

    Hello Jeff,
    My husband and I have 6 Roth IRAs each. He wanted to ladder them so they mature at different times. We each have a Roth maturing soon and we are not sure if we should continue to ladder or add this maturing Roth to an existing account to compound interest. Does the bank honor the original interest rate ( which was higher than present one )? If so, maybe it makes sense to start adding money to the highest interest rate account and stop the laddering. Would appreciate your advice.

    • says

      @ Heather It sounds like you have CD’s inside your Roth IRA’s. Remember: Roth IRA’s do not pay anything. They are just the holding account.

      With CD’s, once they mature, you are then subject to whatever interest rate is available. Depending on when you took your CD’s out, I’m sure that the new rate is probably much lower. You won’t be able to add money to the old ones that are still paying a higher rate.

  14. Ryan says

    My father wants to start a retirement fund for his grandkids, both work and ages are 27 and 29, he wants to put $10,000 per account. neither child has a retirement fund. Should we go standard IRA or Roth, are there limits to the amount grandpa can open the account with.

    Regards,
    Ryan

    • says

      @ Ryan With your kids still being in their 20′s, I would go with the Roth IRA. With the IRA’s (both Roth and traditional) the most he can put it for them is $5,500 (in 2013).

  15. Lee Williams says

    Cannot find my answer to my Roth deposit question on your site. In fact everywhere I’ve looked for the answer to this simple question I’ve found that noone discusses it directly for some reason. I’ll try again.

    My wife wants to move funds from her regular ira to a roth ira at the same place.

    What rate will the deposit going into the roth be taxed at?
    Does the rate change after a certain amount so a larger deposit is taxed at a higher rate?

    Is this a subject I would need to clear up at my local irs office?

    • says

      @ Lee

      The rate will be whatever tax bracket you’re currently in. Think of the Roth Conversion as adding more income (getting a pay raise) to what you’ve already earned for the year.

      Depending on the amount you’re looking to convert it could definitely increase if you’re put into a higher tax bracket.

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