Understanding all the Roth IRA rules may seem difficult, but if you plan on adding to your Roth IRA as a part of your portfolio in order to secure a stable and enjoyable retirement, it makes sense to have all of the current information regarding the current IRS regulations concerning the Roth.
5 Answers to Roth IRA Rules for 2020:
Plus, you want to have a grasp of the current IRA rules for any given year. And with the new year, many people are already planning their retirement contributions and looking forward to what 2020 might bring.
If you made the maximum contribution amount into your Roth for 2020 and are thinking about saving for next year’s contribution, you may also want to know what the new limits are – as well as the new income caps.
Or maybe you’ve just got your eye on the tax season. No matter what, you should be well aware of all of the latest details before you start making decisions about your IRA. Fortunately, we have all the answers in a single article – and you just happen to be reading it.
Need to open a Roth IRA?
My favorite online broker is Betterment but you can check out our recap on the best places to open a Roth IRAand the best online stock broker sign up bonuses.
There are many good options out there, they include:
- M1 Finance – free trading
- Ally Invest – top tools
- E*Trade – top all-around brokerage
No matter which option you choose the most important thing with any investing is to get started! Check out my post on the best short-term investments as well for more info!
2020 Roth IRA Rules You Should Be Aware Of
As to be expected, there are some differences in the Roth IRA rules for 2020 that help this type of account stand out from previous years.
As of late last year, the IRS has revealed it current Roth IRA rules for 2020. This data was based on a variety of factors and figures and includes inflation statistics that they used to come up with new limits for the contributions.
1. Contribution Limits are Unchanged for 2020
Standard Roth IRA contribution limits remain the same from last year, with $6000 being the limit any individual can contribute. In addition, plan participants ages 50 and over have a limit of $7,000, which is commonly referred to as the “catch up contribution.” You can also contribute to your ira up until tax day of the following year.
| Contribution Year | 49 and Under | 50 and Over (Catch Up) |
|---|---|---|
| 2020 | $6,000 | $7,000 |
| 2019 | $6,000 | $7,000 |
| 2018 | $5,500 | $6,500 |
| 2017 | $5,500 | $6,500 |
| 2016 | $5,500 | $6,500 |
| 2015 | $5,500 | $6,500 |
| 2014 | $5,500 | $6,500 |
| 2013 | $5,500 | $6,500 |
| 2012 | $5,000 | $6,000 |
| 2011 | $5,000 | $6,000 |
| 2010 | $5,000 | $6,000 |
| 2009 | $5,000 | $6,000 |
2. Roth IRA Phase-out Limits Have Increased
The AGI phase-out range for taxpayers making contributions to their Roths has increased for 2020, is now between $196,000 and $206,000 for couples who file jointly. A similar increase took place for singles who file taxes and contribute to a Roth IRA. As of 2019, the range where phase-outs begin now starts at $124,000 and ends at $139,000. Meanwhile, married individuals who file separately and have been actively participating in an employer-sponsored retirement plan should see no changes in the phase-out range.
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 roll over 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 2020, the rules are the same as in 2020. Whatever is converted in 2020 must be reported in 2020.
Want more information on the Roth IRA Conversion? You can see more on the conversion tax rules regarding after tax contributions.
5. IRA Recharacterization is Prohibited
If you initiated a Roth IRA conversion and then decide it wasn’t the best idea in previous years, you could do a “take back” in the form of a recharacterization. Due to the Tax Cuts and Jobs Act, you can no longer recharacterize Roth IRA conversions from SEP IRAs, SIMPLE IRAs, traditional IRAs, 401(k)s, and 403(b)s. If the conversion occurred after October 15, 2018, it cannot be recharacterized.
6. *NEWER RULE* Roth Conversions from Your Existing 401k
This new option was released a few years ago in the Small Business Tax bill. 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 401(k) into an 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 401(k) balance.
The key here is “parts.” You still aren’t able to distribute your entire 401(k) 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 these criteria:
- The money has been in there for at least 2 years.
- 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.
In-service distributions are offered by the majority of employers, but they are not a requirement. Check with your employer or plan administrator on availability. Also, be aware that these distributions are complicated, so be sure to consult with your tax advisor before you do anything.
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. If You Can’t Convert to Roth IRA…What About Roth 401k?
If you don’t qualify for the in-service distribution, you don’t have to throw in the towel quite yet. The IRS has released guidance about the possibility of converting your 401(k) to a Roth 401(k). However, in order to qualify or even entertain this option, you must have a Roth 401(k) option with your current plan.
In other words, no Roth 401(k) option = no conversion.
Another important consideration: Unlike the Roth IRA conversion, there is NOT an option to recharacterize with a conversion to a Roth 401(k).
The key to all this is dependent on your 401(k) plan, and unfortunately, 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 and continue asking for the retirement perks you really want. A little bit of pressure and persistence never hurts, and they may end up adding the option if they see there is a demand.
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: https://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 might want to consider opening an account with E*TRADE . Meanwhile, a more experienced trader could really benefit from all the tools offered by Ally Invest or TD Ameritrade.
Which broker is right for you? At the end of the day, it all depends on your situation.
We maintain two Roth IRA resources for readers, and both of them are a good read if you’re ready to open a Roth IRA:
- a list of the best places to open Roth IRAwill walk you through the best account opening options
- a list of the best online stock broker sign up bonuses shows you which brokerage firm offers the best bonus for your account size
Ally Invest
Ally Invest is one of my favorite online brokers. Formerly Trade King, Ally Invest has stellar customer support, intuitive investing tools, and thorough data to support it.
Ally also comes with the lowest trade commissions out there, coming in at $0 on stocks and ETFs. They also have a selection of fee-free funds to choose from.
If you want to add some hands-on trading to your retirement investing, Ally could be the perfect platform for you. You could also earn promotional bonuses and discounts when you create a new Ally account.
E*Trade
For those just starting out and trying to build up a great investing habit, E*Trade is one of the best brokerage firms to go with.
Your trades are also rock bottom priced at just $0 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.
E*Tradehelps you do just that. The interface is simple, and if you can get up to $1000 in free trades 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.
Benefits of a Roth IRA
Obviously, there are certain benefits that come with investing in your Roth with only after-tax dollars. For starters, being able to invest with after-tax dollars offers the distinct advantage of letting your money grow tax-free in this case. When you’re ready to take distributions at retirement age, you won’t have to worry about how the tax landscape has changed, or whether or not you’re at a lower or higher tax bracket than you were before.
Because of this, many financial professionals believe that having a Roth IRA is one of the best ways to diversify your tax liability. By having different types of accounts – including some that tax distributions and a Roth IRA, which does not – you can shield yourself from any unknown changes that could take place within our tax system.
With any type of retirement account, you’ll owe taxes now – or you’ll owe taxes later. Paying taxes on your money now and investing in a Roth IRA means you’ll pay up now, but manage to shield yourself from paying taxes on those funds in the future.
Since many people believe income taxes could be considerably higher in the future, this is often seen as a pretty sweet deal.
Lastly, you can withdraw your contributions to a Roth IRA without penalty at any time, which is why the Roth is also used a long-term savings vehicle for many people. Please note, however, that you can only withdraw contributions without penalty until the age of 59 ½. If you want to withdraw earnings, you’ll pay a 10% federal penalty tax.
The Roth IRA Saver’s Credit
While we know it’s beneficial to save, sometimes the additional money we lose from our wages to save for retirement can be a burden. The US Government implemented the saver’s credit back in 2002 as a way to encourage Americans to start saving more money for retirement. Since then the program has become permanent, and as of 2006 has remained available for those who qualify to claim on their income tax returns. Unlike tax deductions, tax credits can do more than just reduce the tax you owe, they can increase your refund. It is worth trying to see if you are eligible to claim this credit.
Who Qualifies
Not everyone is eligible to claim the saver’s credit. However, if you contribute to a retirement account like a Roth IRA and meet the other requirements you may be eligible to claim the saver’s credit. Students cannot claim the credit, nor can someone who is claimed as a dependent on another individual’s tax return. You must also be 18 years old or older in order to apply for the credit.
Being eligible for the credit is dependent on your adjusted gross income (AGI). Your AGI must be below the set limits in order to apply. Here are the limits for each filing status:
What is the Credit?
The saver’s credit is determined based on a percent of your total contribution to a retirement account. The maximum amount one is allowed to contribute to a Roth IRA is $6,000 annually. The saver’s credit is figured on the first $2,000 of that money or as much as you have contributed up to $2,000. Because the saver’s credit is based on the person’s adjusted gross income in conjunction with their filing status, the amount of the credit will vary for all filers.
Exceptions
Contributions made to military retirement accounts do not qualify for the credit. Also, you can not claim the credit on rollover distributions, nor can you claim the credit on contributions made to repay a previous distribution.
How to Claim It
In order to claim the saver’s credit for Roth IRA savings, you must complete form 8880. You must file form 1040 or 1010-SR in order to use Form 8880. This form is filed with your regular tax return and supports your deduction. Even if you did not make any contributions in the previous year, you can still claim the credit up to the April 15th tax deadline.
Disadvantages of Having a Roth IRA
Of course, not everyone likes the setup and structure of Roth IRA accounts. For starters, the low contribution limit of $6,000 for 2020 ($7,000 for individuals ages 50 and over) isn’t nearly enough to make or break your retirement. That’s why most financial professionals suggest contributing to a Roth IRA only after (or in conjunction with) maxing out your tax-advantaged retirement accounts.
Second, the income caps that government enacts on Roth IRAs severely limit the number of people who can make the full contribution. Third, some people approach Roth IRAs with feelings of trepidation due to a general distrust of the government. Just because you are promised tax-free distributions twenty, thirty, or even forty years from now, doesn’t mean the economy won’t change so much that the rules are forced to change.
Hopefully that won’t happen and Roth IRA distributions will remain tax-free for the long haul, but many investors fear the worst. After all, thirty years from now is practically a lifetime away.
6 Reasons to Get a Roth IRA
Although Roth IRAs are far from perfect, no retirement savings vehicle offers terms that everyone will love. In the real world, there are plenty of reasons a Roth IRA could be the perfect addition to your long-term savings and retirement strategy. Here are 6 times when a Roth IRA makes perfect sense:
1. You think you’ll be in a higher tax bracket when you retire.
If you think you’ll be in a higher tax bracket when you retire or have reason to believe taxes will be higher across the board, contributing to a Roth IRA now might be a tax-savvy move. By contributing with after-tax dollars that were charged a lower tax rate now, you can save money by not paying taxes on your distributions later. At least in theory, this is how it is supposed to work.
2. You want to diversify your exposure to taxes.
If you’re contributing to tax-advantaged retirement accounts in addition to a Roth IRA, you’re in the best position to diversify your exposure to taxes – both now, and in the future. All of us will pay now, or we’ll pay later, but by having traditional retirement accounts and a Roth, you’ll experience a little bit of both.
3. You’re already maxing out your work-sponsored retirement accounts.
If you’re maxing out your tax-advantaged retirement accounts and still want to save more for retirement, a Roth IRA might be a smart bet. After all, it just gives you another place to stash away your retirement dollars – and the money you invest could grow considerably over time.
4. You want to invest for retirement, but think you might need to get your money out one day.
Since you can deduct your contributions from a Roth IRA at any time without penalty, a lot of people use them as a form of long-term savings. They may not think they’ll need to access that money, but they want to leave the door open to the option.
A Roth IRA is a smart place to invest your money if you know that you may need it before retirement.
However, it’s important to note that a Roth IRA will inevitably have more risk than other long-term savings vehicles like Certificates of Deposit (CDs) or savings accounts. With a Roth IRA, you can actually lose money.
5. You want flexibility in terms of when you take withdrawals.
Where 401(k) plans and traditional IRAs force you to begin taking withdrawals at age 70 1/2 at risk of paying a large penalty if you don’t comply, the Roth IRA has no such requirement. Therefore, this type of account is a great option for anyone who doesn’t want the hassle of forced distributions when they get old enough.
6. A Roth IRA is a solid estate-planning tool – at least when it comes to taxes.
If you don’t think you’ll need every penny of your retirement funds, a Roth IRA is a great place to stash away your extra dollars. Since distributions are generally tax-free, you can usually leave your account to your heirs, which will allow them to take tax-free distributions.
With your tax-advantaged retirement accounts, on the other hand, your heirs will need to pay income taxes on your retirement funds as they withdraw them.
The Bottom Line
If you think a Roth IRA might be in your future, don’t delay. Get started now by choosing one of the above accounts to get started with. Not sure which account you want? Our posts on the best places to open Roth IRAand the best online stock brokers can help you figure out which broker will work best for your retirement goals, and your personal investing style.
Sources:
- Treas. Reg. § 1.401-1(b) (1)(ii) and Revenue Rulings 71-295 and 68-24
- https://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.
Karl schroeder says
Please explain why a married person filing taxes separatly and living together not head of house hold can not contribute to a existing I. R. A..
Thanks, Karl Schroeder
Ken Yancey says
I retired august, 2018. can I contribute to my Roth IRA in 2019?
Jeff Rose says
Only if you have earned income
Just Curious says
Is Betterment your favorite because of their disclaimer? “The website that directed you to Betterment is a Solicitor of Betterment (“Solicitor”) and can receive up to $1,250 in compensation from Betterment LLC if you open an account through this page. You will not be charged any fees or additional costs for being referred. The Solicitor may promote Betterment’s investment adviser services and may offer independent analysis and reviews of these services. Betterment and the Solicitor are not under common ownership or otherwise related entities.”
Matt Nichols says
Sorry but recharacterizing these conversations is no longer permitted! More shoddy reporting!
Can I recharacterize a rollover or conversion to a Roth IRA?
Effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act (Pub. L. No. 115-97), a conversion from a traditional IRA, SEP or SIMPLE to a Roth IRA cannot be recharacterized. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans
Jeff Rose says
It’s not shoddy reporting Matt, the laws keep changing faster than we can update articles.
Grace Gasteluz says
I have been trying to get information as to how and when are taxes paid on a Roth IRA account.
it’s hard to find this information.
Jeff Rose says
Hi Grace – That’s the point of the Roth IRA. If you don’t take withdrawals before age 59.5, and you’ve been in the plan for at least five years, there are no taxes.
Jim Amerman says
May want to double check your guidance on recharacterization of a Roth Conversion. I believe it’s only allowed on Roth Contributions
Jeff Rose says
Hi Jim – You’re right, there looks to have been a change on Jan 1, 2018. The article was correct when written however.
Ernest says
Correction: Recharacterization are no longer as of January 1, 2018. Source: https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions
Jeff Rose says
That’s correct Ernest.
frank Colesanti says
I have a Roth IRA and my age is 84. From what I understand the Roth IRA is tax free upon withdrawal, and has been taxed at the time of opening into a ROTH account. It is also tax free to my dependents, upon my death. The interest or gains while in a ROTH account are also tax free. Confirm.
Jeff Rose says
Hi Frank – Confirmed, but there may be some limitations with your dependents. You’ll need to discuss that with both your accountant and your plan administrator.
1099 says
I put money in a vanguard targeted retirement account when I was making money on a w-2
Now I only make money on a 1099
Can I still put money in that account?
Jeff Rose says
It depends on how the account is set up. If it’s a taxable account or an IRA, you can. If it was tied to an employer plan, than no. But you can do a rollover into an IRA, and continue making contributions.
Carol Criado says
I’m already retired. Would a Roth IRA still be beneficial?
Jeff Rose says
Hi Carol – You can’t make contributions since you no longer have earned income. But you may be able to do a Roth IRA conversion with other retirement funds. Check with your accountant to see if it’s worth doing.
pat eisnaugle says
can I make a maximum roth contribution in dec. 2018 and then in jan of 2019
Jeff Rose says
Hi Pat – As long as you qualify based on your income, you can make a 2018 contribution in December, and 2019 in January.
Joe says
I am 52 and resigned from my job of ten years. I took out my 401k to do an indirect IRA.I. am thinking of doing CD IRA. I would appreciate your advice! Thx!
Jeff Rose says
Hi Joe – Without knowing you personally, I’d say you have to determine your risk tolerance, investment goals and time horizon. CDs are VERY conservative investments, that will do little more than keep up with inflation. If you want to grow your money for retirement, you’ll have to add riskier investments, like stock funds. Do some soul searching, and talk to some people who know you well before deciding. You might even want to sit down and discuss it with a financial advisor.
Jeff says
Withdrawing contributions from Roth IRA is not actually penalty free. Once you withdraw contributions you lose the ability to receive the Saver’s Tax Credit for up to three years. This may impact future tax returns by hundreds or thousands, which can be a costly ‘penalty’. Can you confirm?
Jeff Rose says
That’s a good question for a CPA Jeff.
Glen Woolsey says
I have both traditional IRA and Roth IRA. My wife passed away in 2010 and about a year ago I combined her Roth to my Roth account and combined her traditional IRA to my traditional IRA.
Does this affect my Roth 5 year exception?
Also still a little mixed up.
On my ROTH, do I need to pull it before 59 1/2 or after, so there is no penalties or taxes?
Jeff Rose says
Hi Glen – The inherited IRA doesn’t affect your five year rule. The inherited Roth will be subject to it’s own 5 year rule. If it was met while your spouse was alive, it will be met for you with the inherited plan. You’ll avoid penalties and taxes if you wait until after 59.5.
Bill says
Hi Jeff,
Thank you for your article and question answers. I’m stuck on the question of the 5 year rule for withdrawals from multiple Roth Accounts. My wife has a couple of Roth IRA’s which were started 10 and 8 years ago. She is now 57. She recently started a new job and i’m inclined to enroll her into their Roth 401k plan. The 5 year clock for this Roth 401k starts this year, 2018, do we need to worry about the 5 year clock for this new account, after she turns 59.5 (2020), since she already has had a Roth IRA for 12 years by 2020? Hope this isn’t too confusing. Thank you for any thoughts.
Jeff Rose says
Hi Bill – The Roth 401k shouldn’t be a problem if she won’t take withdrawals before 59.5. I’d recommend taking distribution from the older Roth IRAs and avoid the Roth 401k until five years have passed.
Lynn says
I really messed up. I contributed to a small amount to a roth ira last year and did not end up earning income for the year. Since I have earned income this year, will I be able to apply (change) the contribution amount last year to this years contribution and pay the penalty? Please help.
Jeff Rose says
Hi Lynn – You need to discuss this with an accountant. It is a problem, and he or she will have to create a strategy to deal with it. The good thing is there was no tax deduction, which should minimize any penalties.
Sam says
Hi, I am 74 years old and retired last year at age of 73. I have recently opened traditional ira from my 401k and was thinking of opening Roth ira. Would it beneficial to open Roth ira or back door conversion to Roth ira? Since I am over 59 1/2, do I have to still wait 5 years before withdrawing from the Roth ira? Would it be beneficial to leave in traditional ira or do Roth ira for tax benefits? I also, bought stocks in my traditional ira and expecting few. Hundreds % gains this year and want to avoid or minimize tax, what is the best route to take? Thank you in advance. Sam
Jeff Rose says
Hi Sam – Since you’re retired and have no earned income you won’t be able to make regular Roth IRA contributions. That will leave you with only the Roth conversion from either your IRA or 401k. As to whether or not that’s worth doing, you’ll have to crunch the numbers and see how it will affect you’re tax liability. If it’s a large amount you’ll probably want to do the conversion over several years to minimize the tax bite.
Because you’re over 59.5 you’ll be able to access the converted balance at any time. Tax will apply only on the investment earnings after the conversion, until the Roth has been in place for five years.
Bob McCrary says
Wife died, 80 years old, and left Roth and Traditional IRA to son who is 56. Does the 5 years start over for him? After this year does he have to take out at money? Any penalties he should watch for?
Jeff Rose says
Hi Bob – As long as the five year waiting period on the Roth IRA was met by your wife, your son won’t have to pay tax or penalty. But he will have to take distributions. That can be a lump sum, a five year average, or averaged over his lifetime.
On the traditional IRA, he can either take a lump sum or do withdrawals based on his life expectancy. He’ll have to pay tax on the distributions, but not the penalty. Consult with your tax preparer if you have any questions.
Michele Donovan says
My Husband is 57 and I am 56. My husband is employed and I am not but our income falls in the bracket to open Roth IRA’s, I have a very small one in my name under $900. Can we contribute the $6,500 to my current Roth and can we also open a new Roth for him also contributing $6,500? We do file jointly so the next question is can we both contribute $6,500 every year even though I am not employed?
Jeff Rose says
Hi Michele – You can. IRAs, including Roths, allow for a Spousal IRA. You can contribute even if you have no earned income, as long as your spouse has enough income to cover your contribution and his.
Gator says
I started contributing to a Roth 401k each paycheck at work in Feb 2011. I opened a Roth IRA in June 2015. In December 2016 I rolled the 401k Roth to the existing Roth IRA. Subsequently in December 2017 I converted $20K of IRA money to the same existing Roth IRA. I am 65 and retired. With this mess of a timeline, when and how much can I start withdrawing penalty and Tax Free? Does the 5 yr rule on the latest conversion apply to any of the existing IRA Roths opened in 2011 and 2015? Thanx
Jeff Rose says
Hi Gator – It shouldn’t, since they were pure Roths, not conversions. The issue will be on funds taken from the IRA conversion before five years, but only on the income earned on the balance. Talk to an accountant about this, it is pretty messy.
Mike says
I am married and file separately. is there anyway i could contribute to a Roth IRA. My income is more than 10K. I really want a Roth account, but cannot file jointly. Is there anyway around this, and why is this rule in place?
Jeff Rose says
Hi Mike – The $10k income limit is a serious problem if you’re married filing separately. You might try making a contribution to a traditional IRA, then doing a Roth IRA conversion. That’s the “backdoor Roth IRA”.
Senior says
I have had a Roth IRA for 6 years and I took money out before 59 1/2 . Do I’ve to pay taxes? I contributed the max each year. At the time of withdraw I had $40k and $32500 was my invested $. The difference is gains. I withdrew $30k. Will I be subjected to paying taxes?
Jeff Rose says
Hi Senior – Under Roth IRA order of distribution rules, you shouldn’t have to pay tax on $30k in withdrawals, since it’s less than the amount you contributed to the plan.
Lowell T says
You wrote “Meanwhile, married individuals who file separately and have been actively participating in an employer-sponsored retirement plan should see no changes in the phase-out range.” Isn’t the income limit $10,000 for Roth IRAs if you are married and file separately? It seems to me this makes Roth IRAs unavailable for those who file married-separately, since if one spouse does makd less than $10K, it would probably be smarter to file jointly.
Jeff Rose says
You’re absolutely right Lowell. The $10k limit (actually only a percentage of that) really does nullify the Roth IRA for MFS. It’s a heavy penalty imposed on that filing status.
Janelle says
Hi Jeff, First, thanks for your article. It’s very informative. I recently retired (4/1/17) at age 60. Upon retirement, I elected to convert a portion of my retirement into a 401K resulting in a lower monthly pension amount. I have been considering converting that 401K into a Roth 401K or Roth IRA in 2018. I will turn 62 y/o in Jan. 2019, therefore 2018 will be my lowest income/taxed year (I plan to file for SS in 2019). Just wanted to ask your opinion on this move. (I currently have approximately $43,000 in my 401K, $5000 in a 457, and $25,000 in traditional IRA’s.) Any thoughts on any of this…? Thank you so much! JPH
Jeff Rose says
Hi Janelle – It looks like a solid strategy as long as the tax bite will be minimal. You’ll have to wait five years before the income earned on the Roth is tax-free, but after that you’ll have a tax free retirement income. Also, you won’t have to take required minimum distributions at age 70.5, so you can let the account grow for the rest of your life.
Patti says
My husband and I both had Roth IRAs, and sold them both back this past year (2017) for an Enhanced Cash Surrender Value. We have had the IRAs since 2008, and both of us are in our early 60s. The way I understand what I’ve been reading, none of our cash distribution is taxable. Is this correct? We put the money in a savings account for now. Our main retirement savings is in 401K, 403B and savings accounts. The Roths only had around $8 thousand each, which we sold for $11, 628 each. They had barely increased in value from the time we opened them, and we hadn’t added to them beyond our initial $8,000 input, so we were glad to make some profit! (They had a death benefit, too, and we thought of them as our ‘funeral accouts’! )
Jeff Rose says
Hi Patti – You should be OK. Since the Roth accounts are over five years old, and you’re both over 59.5, there should be no tax on the distributions.
Someguy says
If I make a non deductible contribution ($5.5k) to a traditional IRA for 2017 (before April) and 2018. Can I convert the total amount of $11k to a Roth in 2018 tax year.?
I do not qualify for a deductible IRA contribution for multiple reasons (Income, 401k etc)
Thanks!
Jeff Rose says
You can. But the non-deductible IRA will have to be reported for 2017, and the total conversion in 2018.
tim n. says
My 17 y/o daughter income comes in the form of 1099-misc compensation of 2610 dollars for working once weekly. can we open a roth ira for 2610?
Jeff Rose says
It’s earned income Tim, so you can open a Roth IRA for her.
Jason DuBois says
I have had a Roth IRA for many years and transferred it between various companies, currently with Vanguard. I want to withdraw penalty free prior to 59 1/2, but I don’t have a solid record of my contributions to ensure I’m not penalized. What is the best way to get that data and ensure it matches what the IRS shows? Can I just ask the IRS what that number is?
Jeff Rose says
Hi Jason – You can try that, but I don’t know if they’ll give out such specific information, at least not beyond the past few years. You might be able to get IRS transcripts that show your contributions. Of course, only the contributions made will be tax-free, not the investment earnings. I think you’ll be OK, but if you’ve moved money between accounts several times, the IRS might be confused and impose the penalty.
Andrew says
Can I roll over a Traditional IRA into a Roth IRA in 2018 (before April 17) in order to file the appropriate taxes into the 2017 filing?
Jeff Rose says
Hi Andrew – Talk to the broker holding the traditional IRA. At worst, you can do a Roth IRA conversion, and not have to pay tax on the amount of the 2017 contribution (as long as you don’t deduct it on your taxes). You will have to pay tax on the investment earnings, as well as any pre-2017 contributions. Sorry there isn’t a simpler answer, but it all depends on how long you’ve had the traditional IRA and how much investment earnings you’ve had.
Ron says
I am 54 years old. I have been converting approximately $10k every year of my Traditional IRA (which came from a 401k rollover) into my ROTH. Can I also contribute $6,500 of my earned income in the same year?
Jeff Rose says
You can Ron, they’re separate events.
Cherie says
Dear Jeff: i am 57-1/2 and looking to start my first Roth IRA albeit quite late. I do not have any account to roll into it and will start with a cash contrubution of my own. Do I have to wait 5 years before withdrawl of any gains or may I make withdrawls on any of it’s income after I turn 59-1/2?
Jeff Rose says
Hi Cherie – You will have to wait five years to withdraw the earnings portion even after turning 59.5. But you can still withdraw your contributions tax-free at any time.
Scott says
My son made $6,200 and put $1,200 into his employers 403b plan. I want to help him save for retirement. How much can he put into a Roth plan? Is it the $5,500 limit (which when added to the $1,200 would mean $6,700 of total contributions, and $500 more than he made). Or, is his limited to $5,000? The bottom line is, while is income and therefore his 403b contributions are low, can I help him stuff his Roth IRA or must I coordinate 403b and Roth contributions to be not more than his total income?
Part 2. At such time he makes, say, $45,000 and fully contributes to his 403b, can he also contribute another $5,500 to a Roth (assuming limits are same as today)?
Jeff Rose says
Hi Scott – I believe his total contributions are limited to his earned income, so the total can’t exceed $6200. Double check with a CPA to be sure. As to Part 2, he can contribute to both plans as long as he doesn’t exceed his income or the maximum limit of $55,000.
docw says
I currently do not have a retirement plan offered through my company and my wife is not employed. I know there is no AGI limit for traditional IRAs for individuals in our situation (filing jointly where neither has access to a retirement plan), but could we alternately open up a Roth IRA even if our income exceeds the current upper AGI limits? I cannot find if there are income limits (or waiver of those limits) for contributing to a Roth IRA assuming neither spouse has access to a retirement plan through their place of employment.
Jeff Rose says
Hi Doc – Assuming you exceed the income limits, you aren’t able to make a Roth contribution. It doesn’t matter that you aren’t covered by an employer plan. You can find the income limits here.
Barbara says
In 2017, I rolled over a very small 401K into a Roth IRA when I lost my job. I invested the Roth money in a stock. It continues to lose money. I would like to close the Roth; take whatever money is in the account and use it to help pay for upcoming surgical/medical costs not covered by insurance. Do I have to pay taxes on the withdrawal? The amount of money is less than the original contribution. I am 75 years old.
Jeff Rose says
Hi Barbara – Probably not. It will depend on how the rollover from the 401(k) was done. If you paid tax on the amount of the rollover (actually a conversion) when it was made, you shouldn’t have to pay taxes now. If it was a rollover of a Roth 401(k), then no taxes will be due either. Check with your tax preparer, who will know how the 401(k) rollover was accomplished.
Mark says
Very Informative article. Thanks for your efforts.
I am on Social Security and no earned income now. I am 68 and expect to be around for quite awhile.
1. Can I open and contribute to a Roth IRA with only Social Security? If not, then I suppose some earned income is necessary to open one … maybe a part time job would work?
2. How long do contributions and any earnings have to stay in the Roth before any distributions are allowed?
3. In #4 “reason to have a Roth”, you stated that you can actually lose money due to risks. What are those risks?
4. What limitations are there for investments of Roth funds inside the IRA?
Thanks in advance.
Jeff Rose says
Hi Mark – I’ll take each question one-by-one…
1. Nope, must be funded out of earned income, PT job will be fine.
2. 5 years normally, but you’re over 59.5 so you’re OK
3. Money can be lost in stocks, mutual funds, etfs, or any investments that have the potential to lose money.
4. It depends on the broker. Large brokers offer virtually unlimited investment options. Mutual funds families are limited to the number of funds they offer.
Mark says
Thanks for the clear answers. Very helpful.
One more question for you. I am a FX trader – trading from within an LLC. I want to trade from within a Roth but I have a specific need. I need the trading platform called MT4 or Metatrader 4.
Only Forex.com sets this type of “need” up through a trust … trust gets funded. Most brokers (big or medium size) don’t use MT4.
I have searched a bit and found only FOREX.com. BTW I am a TD Ameritrade customer. Their charts leave much to be desired for trading FX.
Do you know of any brokers that do allow use of MT4 without a trust or is that necessary?
Jeff Rose says
I’m sorry Mark, but I don’t.
Christian says
Hi Jeff, I converted my wife’s 401k, from previous employer, to a Roth IRA. I cannot find anywhere if those monies are considered contributions and could be withdrawn without penalties or taxes, as you can do with the usual contributions. We did pay the taxes on them with the rollover.
Thank you
Christian
Winona Simmons says
I would like to know if a person can make more than one withdrawal from their Roth IRA a year. Thanks
Jeff Rose says
Hi Winona – There’s no limit on the number of withdrawals that you can make, but there may be tax consequences, depending upon the type of account that it is and how much you are withdrawing.
If it’s a Roth IRA that you have been contributing to on a regular basis, you can make withdrawals at any time. There will be no taxes or penalties on withdrawals that represent a return of your contributions. However there will be tax on the earnings portion of the plan, if the money is withdrawn before you turn 59 1/2 and have been in the plan for less than five years.
If the Roth IRA includes funds that were converted from a tax-deferred plan, then you will owe tax on the amount withdrawn, and a penalty if you are under 59 1/2.
But there’s actually no limit on the number of withdrawals that you can make.
Edward says
I had a 401K account with the company I was working last year. On September I go laid off and retired , too. I’m 68 years old. I transferred the 401K to and IRA ac.
Will be good to change my IRA ac to a Roth IRA now to avoid the taxes when I will get 70 1/2 years old. Is it possible?
Which is the procedure to change from my IRA ac to a Roth IRA ac. ? Is it good to do it for saving money?
Thanks
Jeff Rose says
Hi Edward – It will make sense to do a Roth conversion if you want to avoid required minimum distributions (RMDs) when you turn 70 1/2. In the Roth account, you’ll be able to let the money grow for the rest of your life, and take distributions only when you want. But please sit down with your tax preparer to determine if the conversion makes sense from a tax standpoint. You don’t want to do the conversion while you have a high tax rate, only to save the money from lower taxes when you start taking distributions.
Mina Dali says
Hi, I am still considering opening an roth 401 from the company I worked right now. Is that thing is the same as roth ira? If not, can I apply in a bank or any institutions outside my company for roth ira? Can I just contribute for 3 years only? How long do I have to contribute for roth ira?
Thanks
Mina
Jeff Rose says
Hi Mina – You should take advantage of the Roth 401k at work. You can payroll deduct right into it. Also, the employer might make a matching contribution into your regular 401k so that will be extra money. You can also set up your own Roth IRA, but contributions will be limited to $5,500/$6,500 per year between the two accounts. You can contribute for just three years, as there is no time requirement on contributions.
Lani Miller says
My husband will retire on May 1 of this year. Are we eligible to contribute to our Roth IRAs through the end of this year? (2017) Or must we stop all contributions once he is no longer employed? I am aware that we can contribute for 2016 through April 17, but he will receive a sizable check for unused vacation…but those funds will not be available to us until AFTER his official retirement date. Thank.
Lani Miller
Jeff Rose says
Hi Lani – You can make a Roth contribution for any year in which you have earned income, and that seems to be the case for 2017. Also, you can’t make a Roth contribution for more than you earned. So if his earned income was $4,000, the contribution will be limited to $4,000, even though the maximum is $5,500/6,500.
Steve says
What are the implications if you invest in a Roth IRA to reduce your taxes owed on April 15th, then withdraw a large portion of your investment if needed within 6 months of investing. I’m over 60. Great info
Maya says
If I added only $3500 to ROTH (for year 2015) before April 15 2016, but later added $2000 to max out my ROTH (for year 2015), do I need to amend my 2015 tax return?
Jeff Rose says
@maya If the amount you contributed to your Roth IRA is different than what you reported to the IRS then I would definitely amend your tax return.
Maya says
Thanks Jeff!
david kweder says
I transferred approximately $50M FROM MY IRA TO MAY R0TH IRA .CAN I TRANSFER $25M BACK TO REDUCE MY RMD. DAVE KWEDER
Jeff Rose says
Hi David – I’m not sure exactly what happened. Is the transfer you’re referring to an RMD? If so, you can’t transfer the money back to reduce the RMD. Please discuss this with your tax preparer as there will be personal circumstances that can change the outcome, one way or another.
Davis says
Consider: I contribute $5500 dollars in 2016 and it is invested and I make $1000. In 2016 I also withdraw $4500.
1) Can I add the $4500 back before the end of 2016 tax year without “over contributing”?
2) If I am only able to add back $3500, will the IRS see my total contributions as $2500, or will I be penalized for not removing the gains associated with my withdrawal?
Jeff Rose says
Hi Davis – Wow, that’s a real theory question. Even if you could do it, I think the in-and-out will invite IRS attention so I’d strongly recommend against it. A CPA might tell you otherwise, but I’m of the opinion that returning either $4500 or $3500 could be classified as an excess contribution subject to stiff penalties. It might be better to use the withdrawn funds to make a contribution in 2017. But please discuss this with a CPA before proceeding as you might find yourself in a bit of a mess. I get what you’re describing in theory, but I don’t know if the IRS will see it that way.
Kerlyne says
I have a 401k from my previous employer but for the last 6mths i’very lost almost &5 thousands dollar and I’m afraid if I don’t so something with my money now then i’ll ended up losing all of it. I’ve been looking into a Roth ira or traditional ira not sure which one would benefit right now.
Jeff Rose says
Hi Kerlyne – You can also lose money in a traditional or Roth IRA. The potential for loss is a part of investing, and it can’t be avoided with even the best investment strategies. That said, there are 401k plans that have such poor investment options that you’re more likely to lose money. If you suspect that’s the case, then you might rollover the 401k into a self-directed account. Just remember that you will have to pay tax on the conversion to a Roth IRA, but not on a traditional IRA.
Brian says
I’m 37 now. I have savings, 401k, and a traditional ira from a previous job. I want to open more ira/savings options for myself and my wife for retirement. Would you recommend laddering ira cds(are these limited to the 5500 a year as well), opening a new roth ira for both of us, or even laddering tradition cds at this point. Also with the traditional ira from the rollover of the 401k, should i change that to a roth ira or roll that into my new 401k at work?
DINO ROSETE says
I earn over $100k/year, same with my spouse. We file tax jointly. Are we allowed to EACH open ROTH IRAs?
Jeff Rose says
Hi Dino – Yes and no. Yes, in that you are entitled to each make a Roth contribution. But based on your combined income over $200k, you’re not eligible. The allowability of a Roth phases out on a modified adjusted gross income of between $186k to $196k for married couples.
Mick Blackledge says
I am over age 71. I would like to convert my IRA into a Roth IRA.
Does my age remove the no withdrawals for five years rule.
Thank You
Jena says
Hi Jeff,
I turned 50 this year, 2015, on March 20.
Can I take out $6500 for the 2014 year as a catch up–even though I was 49 in 2014?
Do tell…
Thanks,
Jena
Bev says
Can you buy a Roth IRA if I have no earned income ?
Jeff Rose says
@ Bev No, unless you have a spouse that has earned income. Then you both could fund a Roth IRA.
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?
Jeff Rose 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.
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
Jeff Rose 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).
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.
Jeff Rose 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.
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
Jeff Rose 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.
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.
Jeff Rose says
@ Thomas Since your income is below the Roth IRA phaseout threshold you can contribute to a Roth IRA.
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?
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.
Jeff Rose 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?
Charlie Walker says
Can a conversion from a traditional IRA to a Roth IRA count as part of an RMD?
Jeff Rose 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.
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
Jeff Rose 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.
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.
pat says
does roth distributions follow the same 59.5 rules as traditional iras
Jeff Rose 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.
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?
Jeff Rose 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.
Vincent says
My kids are in college and are doing a paid summer intern. Can they open their Roth IRA? Please advise. thanks.
Jeff Rose says
@ Vincent
They sure can!
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.
Jeff Rose says
@ Cecile If your granddaughter has earned income then you certainly can open a Roth IRA for her.
Shasta says
Thanks for these tips. I had been looking all over on the IRA recharacterization rules!
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.
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.
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.
Remy says
I appreciate the tips, as I’ll be attempting to max out my Roth IRA contributions in 2012.