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Roth IRA Basics (Updated for 2012)
I originally published this post a few years back, but have completely updated it for the 2011 and 2012 calendar year.
Why mention 2011? It’s still not too late to contribute! You can contribute to your Roth IRA for the previous calendar year up until the tax deadline.
Roth IRA’s are a great additional to your retirement savings arsenal. I’ll cover most of the basics here, but you you may also want to check out the IRS Roth IRA page for more basics, particularly those related to tax issues.
What is a Roth IRA?
A Roth IRA is a retirement investment account. Within a Roth IRA you can purchase any investment that you’d like – cash, bonds, options, CD’s, stocks, mutual funds, etc.
How can I Start a Roth IRA?
Any of the online discount brokers offer them. You can open one just like any other investment account. And you can have multiple accounts.
Are Roth IRA Contributions Tax Deductible?
No. Traditional IRA contributions are tax deductible, but Roth IRA contributions are not.
What are the Benefits to having a Roth?
Contributions that you make to a Roth IRA are after tax, meaning that you’ve already paid taxes on them. As a result, you do not have to pay taxes on them ever again. This includes distributions when you withdraw the funds in retirement. This can be advantageous because many people predict that they will be taxed higher in retirement than they currently are. Also, some people want to lower their taxable income or pass off their IRA to their heirs, tax free.
How does a Roth differ from a Traditional IRA?
Contributions to traditional IRA’s are tax deductible at the time of contribution, however you must pay tax on your distributions in retirement. Contributions to Roth’s, on the other hand, are taxed now so that distributions in retirement are tax free. You basically decide whether or not you want to be taxed now or taxed later when choosing which to contribute to.
When can I Withdraw Contributions, Tax and Penalty Free?
At any time. You already paid the taxes on them.
When can I Withdraw Earnings Tax and Penalty Free?
Earnings distributions can be made without tax and penalty at age 59 and 1/2 if they have been held for a minimum of 5 years.
Are there any other Times Earnings are Tax and Penalty Free?
Yes, in the event of death, disability, or first time home purchase.
What if Earnings are Taken out Before Retirement Age?
They are subject to income tax and may also be subject to a 10% penalty. There are certain exceptions, however.
Can I have a Roth and Traditional IRA at the same Time?
Yes. You can have both accounts at the same time.
Can you Roll Over a Roth 401K Into a Roth IRA?
Yes, you can roll over a Roth 401K into a Roth IRA, just like you can roll over a Traditional 401K to Traditional IRA.
What was the 2011 Roth IRA Contribution Limit?
$5,000.
What is the 2012 Roth IRA Contribution Limit?
Also $5,000
What is a Roth IRA Catch-up Contribution? How much is it?
If you are age 50 or older, you can contribute an additional amount to a Roth IRA each year. This is commonly referred to as a catch-up contribution for investors nearing retirement. For 2011, the Roth IRA catch-up contribution is an additional $1,000. The 2012 catch up contribution is the same.
What is the 2011 Roth IRA Contribution Deadline?
You can contribute up until the tax filing deadline in the following year. In other words, for the 2011 tax year, you can contribute up until April 15, 2012. For 2010, it was April 18, 2011. And for 2012, it will be April 15, 2013.
Can I Contribute to a Roth and Traditional IRA in the Same Calendar Year?
Yes, you can contribute to both a traditional and Roth within the same calendar year, but the maximum IRA contribution limit allowed by the IRS is for the two combined. For 2011 and 2012, this means that you could contribute $5,000 total between the two.
What are the 2011 Roth IRA Income Limits?
The 2011 Roth IRA income limits are:
- Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $169,000 (up from $166,000 in 2010), you can contribute up to the $5,000 max. If at least $169,000 up to $179,000 (both up $3,000 over 2010), your contribution limit is phased out (see IRS publication 590). If $179,000 (up from $176,000) and above, you cannot contribute to a Roth IRA.
- Single, head of household, or married filing separately and you did not live with your spouse at any time during the year: If under $107,000 (up from $105,000 in 2010), you can contribute up to the $5,000 maximum. If at least $107,000 up to $122,000 ($120,000 in 2010), your contribution limit is phased out. If $122,000 and up, you cannot contribute to a Roth IRA.
- Married filing separately and you lived with your spouse at any time during the year: If MAGI is between $0 and $10,000, your contribution limit is phase out. If $0, you can contribution up to the $5,000 maximum ($6,000 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.
The 2012 Roth IRA income limits are:
- Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $173,000 (up from $169,000 in 2011), you can contribute up to the $5,000 max. If at least $173,000 up to $183,000 (both up $4,000 over 2011), your contribution limit is phased out (see IRS publication 590). If $183,000 (up from $179,000) and above, you cannot contribute to a Roth IRA.
- Single, head of household, or married filing separately and you did not live with your spouse at any time during the year: If under $110,000 (up from $107,000 in 2011), you can contribute up to the $5,000 maximum. If at least $110,000 up to $125,000 (was $122,000 in 2011), your contribution limit is phased out. If $125,000 and up, you cannot contribute to a Roth IRA.
- Married filing separately and you lived with your spouse at any time during the year:If MAGI is between $0 and $10,000, your contribution limit will phase out. If $0, you can contribute up to the $5,000 maximum ($6,000 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.
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My name is G.E. Miller and 
David Lee Roth, you sneaky guy. Good overview of just about anything you’d want to know about a Roth IRA. I maxed mine out last year, but it might be hard to duplicate this year.
Ah, nice intro. Bookmarked. I’ll “link out” to this article down the road when I go through different investment tools. Saves me time!
Excellent summary. I’ll probably link to this post soon!
I did find this very interesting and necessary for a beginner like me. I’m trying to start a new IRA account and hopefully budget the minimum per month to contribute just to get things started. Where can you begin to set up one of these accounts?
@Craig – any discount broker really. I have mine through Etrade b/c there are no maintenance fees (but I don’t know if that’s grandfathered in, or still true today).
@GE Thanks, I’m going to do more research, talk to my parents, and then decide on where to start
To the author G.E. Miller – my husband and I each have a Roth IRA which matures on 3/29/09. Can we only make a contribution on or around this maturity date, or can one contribute to a Roth IRA at any time?
How do I decide what types of investments should go into my Roth IRA. ING Direct offers a Roth IRA consisting of CDs, whereas Fidelity offers Roth IRAs consisting of one of their Freedom Fund mutual funds. Can a Single Roth IRA have both? What factors should go into deciding what types of investments should go into a Roth, especially given today’s economic climate?
@G.E. – You manage to provide a very concise and valuable overview of Roth IRA features in just one page ¦ Very well done!
@Kelly – You can contribute to your Roth IRA on any day of the year and up until April 15th of the following year. For instance, if you want to make a contribution for the 2009 tax year, you can do so anytime until April 15th, 2010. Contributions after that date count toward the 2010 tax year.
@Nicole – An individual person can only have one Roth IRA, although the account can be split between multiple institutions. For instance, you can have a Roth IRA with both Fidelity and Charles Schwab, but in the eyes of the IRS, its the same Roth IRA.
That said, you can hold multiple types of investments inside your account ¦ CDs, stocks, bonds, etc.
As for what you should invest in, it really depends on your age, your goals, and your time horizon. If you’re still twenty or so years from retirement, then a stock index fund is probably a better choice than a CD, because you’re more likely to beat inflation – even in a scary environment like this. Stocks are cheaper now than a year ago, so now is probably a great time to get in for the long-term.
Very nice Q&A! I will probably max out mine soon; trying to get in as much as I can before the market rebounds.
I have a Roth IRA.I have been declared Disabled. I am 46 yr old.
I understand that I must get rid of it. I do not want to lose it
It is about 5,300.oo Is it possible to have it put in a special
needs trust.
Great summary about Roth IRA. Thanks for that!
I am 24 and have been thinking for a while now to open a Roth IRA account but i simply cannot decide which would be a best investment (not knowing much about the options available and pros and cons of each) thats safest in terms of losing money if the prices of stocks go lower.
Under what is roth IRA you said
“you can purchase any investment that you’d like – cash, bonds, options, CD’s, stocks, mutual funds, etc.” can you explain this a bit more, maybe pros and cons of them and rate them from safest to riskiest?
A website where i can collectively read about them would be helpful as well.
Thanks
I’m retired, I get a small pension and social security benefits for income, total about 23,000 a year. Can I roll over my traditional IRA to a Roth IRA? Is it wise to do this?
New reader here! Just wanted to say great overview of the Roth! I think I’ll be linking back to it in an upcoming post on retirement account overviews.
New reader here!
Just wanted to say great overview on Roths! I think I’ll be linking back to it in an upcoming post on retirement account overviews.
I have a variable rate annunity which I first purchased in 1996 and have been making annual contributions. The VR annunity serves as my SEP. I have learned that I can now withdraw 15% of the annunity value each year without any surrender charges from the issuing company (Hartford). I’m wondering if I can take that 15% withdrawal each year from the VR Annunity and fund a Roth IRA? I presume I’ll have to pay takes on the 15% withdrawal, would it be worth it? Is it legal?
I’m a active duty soldier and have been trying to do my homework on the best retirement investment option for me. Quick rundown on my situation/dilemma, hah. I 26 years old, been married about a year, and me and my wife have a child due (first) on Feb, 12th 2010. That being said, I have been in the army for 3 1/2 years and just re-enlisted for 4 more. I plan on staying for at least 20. With me sharing all that, the part I get confused about dealing with retirement is that the army tries so hard to push the TSP on me. My wife, who works for the VA (a nurse) has the TSP since its a federal job. they actually match her up to 5%. The army’s TSP doesnt match at all. I decided to try to learn about other IRA options and discovered the ROTH IRA, which is interesting me very much, because of the “pay taxes now, withdraw tax-free later”. As I stated earlier, I’m active duty military so the benefits are wonderful ( from both me and my wife’s job ) but I dont have a whole lot of extra money to put up front every month for retirement. I’ll try to cut the rambeling, and get to the point, hah. Im just very confused as far as my situation as to what is best for me and my family. I certainly plan to retire from the army after 20, (I’ll only be 43) and start another job to retire at, but Im looking at either a IRA, TSP or ROTH IRA with limited funds on a military salary. Also, when it comes to the TSP , and the ROTH IRA, the different ways you can invest confuses me a lot. Sorry for typing so much and asking so much, this has been a major headache for me ever since I started researching and learning, but now I am addicted to ” retirement knowledge “. I guess someone previously stated that the is some form of a equation for what you should invest in, dealing with what your goals are, TIME ( I think is a big one) etc…. Once again, sorry for writing so much and ANY information would be more than helpful, thank you.
Josh
I have my Roth fully invested in closed end funds that pay
monthly dividends. Do you pay tax of any kind on those
dividends and what about a capital gains tax on any stocks
that may be in there ?
IRA is a good thing. But the government should regulate risks of the operating companies necessarily
Very easy to read and to understand. I like simple stuff and straight forward.
IRA is a good thing. This one is a really nice investment article. Would save my time, so i have bookmarked it.
I am new to this… very new and I have a question. It might be a dumb one, or one that doesn’t make any sense. Ok, let’s say I start a Roth IRA at age 24. As an individual it is ok for me at this time because I am not married. Now let’s say I get married within 5 years. Does this affect my individual Roth IRA?
What I mean is that by first doing this young like me then getting married is that still ok? I know you touched up on it in your seceond to last qusetion, but I was curious about this part.
Sorry if my question doesn’t make any sense, which it probably doesn’t but any information would be helpful thanks!
Nice blog. It was interesting to know many facts of maintaining your car efficiently. I did not have much idea about these things to be taken care for maintaining my car well. I would be expecting more posts on such important and useful facts from you.
Very informative post. Also worth noting that the contribution limits stay the same in 2010.
I’m active duty as well…just read Josh’s post (13 July) and have similar questions. I didn’t really see where anyone answered him (maybe I missed it), but here’s my situation – military, married, kids, can afford about $200 per month contribution, eligible to retire in 6 or up to 10 years (prior enlisted officer) at 40-45 years of age, plan to get another job afterward. I always hear/read about stock/cd/bond Roth IRAs. I’m not too savvy when it comes to all that. How do cash ROTH IRAs work? Which companies have the best interest rates? Is it like a savings account that you don’t touch until you’re at least 59.5 years? Thanks.
I have been unemployed the whole year with no earned income. Can I contribute some of my unemployment money to a Roth IRA?
When I start withdrawing my traditional IRA and Roth IRA money and pay the taxes, will I in anyway be double taxed on my Roth IRA since I already paid taxes on that money?
In 2008 I put 3000 in Roth took out 1500 for an emergency. AGI was 155K for 2008. Full contribution in 2009 dividends re-invested. Now come to find out that my AGI was about 185K. Already started contributing for 2010. What do I do? Should I pull it out and…???
I’d check with your account administrator, but from what I understand, yes. Roth contributions that are withdrawn before the end of the year count as if you didn’t contribute for tax purposes. You can then decide on another investment vehicle.
It’s a no-brainer to start a Roth IRA account if you can, because taxes are only going one way in this country. Up. So save $200 a month in a low cost Roth IRA account and you will be grateful in 25 to 30 yrs when you retire. Also. don’t forget while Roth IRA’s are only tax free at withdrawal from a federal perspective. You still have to pay state tazes.
You are right – withdrawal is one thing and state tax another one (and much more painful). Roth IRA might be a good addon but a real deal is to work hard while you can and save as much as possible. DON’T COUNT ON ANY retirement plans – if you’d like to share your story about Roth IRA – visit RothIRA.org.
I have a Revocable Living Trust. Can I name my Trust as the beneficiary of my Roth IRA or does the beneficiary have to be a person?
Will your answer to my question be sent to my email address?
Are there any other Times Earnings are Tax and Penalty Free?
Yes, in the event of death, disability, or first time home purchase……..ISN’T IT THE CASE YOU CAN PULL MONEY OUT TAX AND PENALTY FREE FOR COLLEGE EDUCATION EXPENSES????? BIG MISS.
I think a lot of people don’t realize the benefits of the Roth IRA in terms of tax free growth. I’ve seen several of my friends invest in retirement funds without using the Roth IRA vehicle simply because they didn’t know it exists.
If I file my 2010 taxes on Feb 15 2011, can I can still make contributions towards my 2010 Roth until April 15 2011?
Yes you can. Do your taxes and put the amount you plan to contribute, but just make sure you get it deposited by Apr 15 or you’ll need to amend.
Oops, I missed that you had a ROTH. I assume you are concerned about yearly limits then? Yes you can, but you have to let your bank know that you want it to count as last years contribution at the time of deposit. They will make the accounting notation.
if a stock in a roth ira makes a profit and is sold. does one pay taxes on the profit Thankyou.
No, as long as you don’t withdraw the money early.
so if im married and we make 85,000 together married i cant contribute?
It’s great so many people are participating in their own retirement plan. More and more companies are forgoing retirement benefits and pension plans while putting more responsibility on the individual for saving their own money. Who knows if this trend will continue or it’ll change once the economy pick back up. It’ll be interesting to see?
It’s a good thing this article was updated since the numbers can change every year.
Best suggestion for $25,000 a year income in this acconomy.
Thank you for the very informative article on Roth IRAs. The income limits were especially helpful, as I know people who are making way too much money to invest in a Roth. Gives me something to warn them about!
Thanks!
Just want to make sure of a few things before meeting with HR before the new job. Annual salary projected to be 43,000. I’d like to make maximum contributions to: 1) Trad 401k through the company, and 2) Roth IRA already opened, but hungry for input. Is it correct to say 17,000 to the former and 5000 to the latter as maximums for the year? Or is there a maximum *percentage* I can make per year based on salary/income? Could always go with after tax contributions to some index funds or some such arrangement if there ARE percentage limits right? Anyone in-the-know on this matter? Thank you!!!
Thanks Robby.
I’m basically retired, but my wife & I both earn part-time income. We will earn about $15,000 this year.
-Does that mean we can each contribute the max $5000 to our IRA’s?
-And since we didn’t contribute last year, can we each contribute $1000 as catch-up contributions?
-Then we can leave it there to earn tax-free dividends, etc., as long as we want?
-Any reason not to do this?
Again, thanks very much for this helpful website.
-TVZ
Oops, sorry, GE. I meant to address this to you!