Roth IRA Basics (Updated for 2012 & 2013)
I originally published this post a few years back, but have completely updated it for the 2012 and 2013 calendar years.
Why mention both years? Even if you are past your calendar year, 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 addition 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 2012 Roth IRA Contribution Limit?
$5,000.
What is the 2013 Roth IRA Contribution Limit?
$5,500. It was just increased for the first time since 2008.
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 2012, the Roth IRA catch-up contribution is an additional $1,000 over the standard annual maximums. The 2013 catch up contribution is the same.
What is the 2012 Roth IRA Contribution Deadline?
You can contribute up until the tax filing deadline in the following year. In other words, for the 2012 tax year, you can contribute up until April 15, 2013. And for 2013, it will be April 15, 2014.
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 2012, you could contribute $5,000 ($6,000 if age 50 or older) total between the two. For 2013, you could contribute $5,500 ($6,500 if age 50 or older).
What are the 2012 Roth IRA Income Limits?
All good things have limits. It’s no different with Roth IRA’s. Beyond certain income thresholds, you can no longer 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.
The 2013 Roth IRA income limits are:
- Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $178,000 (up from $173,000 in 2012), you can contribute up to the $5,500 max. If at least $178,000 up to $188,000 (both up $5,000 over 2012), your contribution limit is phased out (see IRS publication 590). If $188,000 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 $112,000 (up from $110,000 in 2012), you can contribute up to the $5,500 maximum. If at least $112,000 up to $127,000 (was $125,000 in 2012), your contribution limit is phased out. If $127,000 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 $5,500 maximum ($6,500 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.
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I am G.E. Miller, & 
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!!!
The contributions to your company’s 401k plan is governed by a plan document which outline the maximum contributions you would be able to make based on your salary. I have seen these maximum percentages range from 50 to 100% of eligible compensation. In any case you should contribute the minimum to your 401k to max out your employer match(as applicable) and then move on to contributing to your Roth. Any left over I would continue to fund your 401k or put into an after tax brokerage account. The maximums for any retirement plan can be found on the department of labor or IRS websites for any calendar year. I hope this helps!
Thanks for being a wealth of ‘wealth-building’ knowledge Ben!
(Found out through HR that there’s a 25% of salary maximum and opted for it, but thanks for that bit about after-tax brokerage accounts. There’ll still be the chance to max the Roth IRA and put more away.) Operating on the idea of $17,000/yr 401k max and $5,000/yr Roth IRA max.
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!
Your contributions to an IRA are limited to your earned income. As long as you and your wife earn over 10000in a calendar year, you would be able to max out your contributions. If you are over age 50, you can contribute the catch up amount in the calendar year but you can’t contribute catch up for missed contributions in prior years.
I believe for people in their 20′s there is no better retirement saving vehicle than a Roth IRA. It can double as an emergency fund since contributions can be taken out without penalty. Also, most people early in their career are in a low income tax bracket compared to the rest of their career. It makes sense for them to pay the taxes now versus in retirement where if they have been consistently saving I would expect taxes will be higher.
I’ve been maxing out my Roth for the past two years and want to invest. What happens if my profit exceeds $5000?
Earnings don’t factor in. Only contributions.
Can you contribute to your spouses Roth Ira same year they died?
We own real estate and need to pay property taxes. I am the sole beneficiary and want to keep the Roth as inherited in case I want to sell the real estate sooner( I am 54 and he was 66)
Can anyone answer the following question: Can I invest in a closed end fund in a Roth IRA and begin taking the monthly distribution immediately tax-free. I’m 73 years old and have income from wages. Thanks.
Larry, you should research the “5-year rule” for Roth IRAs. For the “earnings” to be tax free, you must have had the Roth for 5 years. Note that when you start taking distributions from your Roth, the IRS considers the distributions to first come from your contributions, then conversions (if any), and then lastly the earnings.
So, yes, you can begin to take monthly distributions tax-free from your Roth today — because the IRS considers those withdrawals to be coming out of the “contributions” you made, not the earnings. And contributions can always be withdrawn tax/penalty free at any time.
Once you have withdrawn all your contributions from the Roth, then you will begin withdrawing from your “earnings” in the account, and that money will only be tax/penalty free if you’ve had the Roth for 5 years.
Note: I’m not a tax professional, so I suggest you call the IRS helpline to confirm what I’m saying.
Very informative!!
I am 69 and retired. Due to the past presidential election, I’m concerned about put additional money into my Roth account. I think the markets will go down in 2013 and I will loose my investments.
What should I do?
Thanks in advance..
Gary
Stop watching Fox News.
Gary – Just a thought – There are a number of investment options that are not market based. For example if you invest through Vanguard – you can hold the money in a money market fund. In that fund it won’t grow or shrink with the market. You can hold it there and then when you are ready to invest you can put it in the market.
Another great thing to know is that even if you have a MAGI (Marginal Adjusted Gross Income) of more than the max income allowed before contribution limits kick in ($112,00 for singles in 2013) you can still contribute to your ROTH IRA.
By contributing to a traditional IRA and then immediately rolling into a ROTH IRA you bypass the limits imposed. You will be taxed on the contributions as they enter the traditional IRA (since you cannot deduct contributions on traditional IRAs with a MAGI over ~65,000 for singles) and there is then no cost to roll into a ROTH IRA.
-Yanni
This is would only work if you DO NOT already have a Trad IRA or Rollover account with deductible contributions in it. If you do, the amount that you contribute and then attempt to convert will be considered as a percentage of the entire IRA balance and you will have taxable income for the deductible portion. e.g. $45,000 Trad or Rollover IRA beginning balance, 5,000 non-deductible contribution and conversion, results in only 10% of conversion deemed to be from non-deductible contribution and 90% of conversion from beginning balance. Therefore, $4,500 is taxable income treated like a normal Trad to Roth conversion. So little or no benefit is achieved through the stated method.
The method would work only for high earners who are just beginning to contribute to an IRA and/or who have only made non-deductible contributions in the past.
Great website! Thank you!
Two different questions. My wife just closed her 7,000 401K with the intention of transferring to a traditional ira. She will have to deposit the check in two separate years because of the maximum, right?
Second question: I have $10,000 to start a retirement savings. I’m 31 and just getting to this now. I just started an account with the maximum $5,000. What date can I deposit the second half? After I file my taxes?
1. 401K rollovers are exempt from annual maximum limits.
2. You can deposit now for 2012 up through the 2012 tax deadline in April. You can deposit for 2013 starting Jan. 1, 2013.
Thank you! That was what I was hoping you would say!
Remember though, the 401k rollover money must be deposited within 60 days to the rollover account.
This blog was the first search result I received when trying to determine how much I can contribute to my Roth IRA this year (I did not know there had been an increase). After I got my answer I browsed the blog for a bit and was really impressed at what I saw! I definitely live on the cheap (no television, rent books and DVDs from the library, cook as much as possible from scratch) and would like to read some more posts. I especially loved to hear from an MSU graduate! GO GREEN!!! GO WHITE!!!
G.E. – Contribute to a Roth IRA – Regardless of your income! Your update left out the 2010 law changes! The Roth Income Limits are no longer an issue because after 2010 the roll over income limits have been lifted and there are no income limits on a traditional IRA. So, someone making a million $ could contribute $5,000 to a traditional IRA and then the next day roll it over to a roth ira – basically bypassing the roth contribution limits.
Watch out with this type of advice please as it only applies in very specific circumstances and could land someone with a large unexpected tax bill. See my post above in response to Yanni. This method only works if you are just beginning to contribute to a Trad IRA account. If you have existing Trad or Rollover balances you will pay taxes pro rata which is not what would have been intended.
I’m somewhat confused on the maximum amount I can contribute to Roth IRA and don’t know if I messed up or not.
I’m 53, single and live with boyfriend who pays everything in house, so was able to save some money so I opened a Roth in July 2012 and contributed the full $6000.
I have a part time online business and collect my payments through Paypal and they will send me a 1099-K stating approx $20,000 of payments received. After all my deductions (shipping costs, cost of products, my daughters college tuition, etc), my tax AGI line 37 will show approx. $3000. Is the max I should of put in $3000 or can I still keep the $6000 I contributed OR should I do my taxes to show AGI line 37 at $6000.
Also, do I report the contribution on my taxes?
Or if I’m mistaken, what line does the max contribution to Roth IRA go by on my taxes or my 1099-K. Thank you in advance for any answers.
Never mind…got my answer.
If my husband passes away in the future (he is in his 90th year, can i convert his IRA into a Roth Ira for me without tax consequences? If so, how do I do that? What do I need to title it?
Thank you
Hello I have a few questions I’m 28 and would like to start a Roth IRA but have no prior investments to roll over so how much money will I need to come up with to open a account. Also are some of the larger company’s such as T rowe or vangaurd better than others.
check out this post: http://20somethingfinance.com/discount-online-broker/
the opening minimums should be up to date, but you should double check.
Greetings.
I normally contribute to Roth IRA lumpsum of $5K for previous year before April 15th of this year. While filling taxes (married jointly) for 2012, I realized that my wife’s and mine combined salary is at $185K which is above the limit of $183K. Could you please advise on what options I have to invest in Roth IRA. I have been doing this dilligently for last 5 years and so far my returns have been at 47%. I really don’t want to miss out on the contribution.
Thanks!
If I contribute to my employers Roth 401k ($5k, no match) can I also contribute to a Roth IRA?
I have a 401k which I would like to rollover. This is currently the only retirement arrangement that I have open – I do not have any IRAs, however my wife does have an IRA in her name (I believe it is a traditional IRA).
I would like to rollover the 401k into an IRA or Roth IRA, however I would like to advoid a tax hit in 2013. If I have not yet opened an IRA, am I able to roll it over until the 2012 tax filing deadline of April 15? I made much less money in 2012 than I will be making in 2013, so this is my rationale behind my approach.
If I am not able to do what I suggested, can I rollover the 401k, which is in my name, into my wife’s IRA? Thanks.
You appear to be considering a 401k rollover and then possibly a Roth conversion. Both of those would have to happen by 12/31 to be considered within the tax year. You generally cannot transfer IRA assets other than under special circumstances (such as a divorce decree).
I have a question: I just discovered that the transfer of funds into a Roth IRA did not go through last year (for 2011). (they had notified me but I never received the letter, apparently they were off on the account number). However on my taxes, since I thought this was taking place, I declared a $5,000 contribution. I plan on making a contribution again now(ie for 2012). So, is there any way to rectify this? Do I have to re-submit my taxes for last year? thanks for any replies to point me in the right direction.
Well since a Roth contribution is NOT deductible anyway, the fact that it never went through for 2011 is basically irrelevant to your 2011 taxes. Only a traditional IRA contribution is deductible.
You would need to amend your 2011 taxes to remove the deduction for a Roth contribution (whether it went through or not).
Roth contributions are “after-tax” contributions since they are tax free upon withdrawal.
Hi GE,
Thanks for the great info.
Couple of questions:
1) My wife doesn’t have an IRA. We are in a position to contribute for 2012. In 2013 our income will exceed the max for Roth contributions. Does it make sense to open a traditional or a Roth for 2012, if the 2013 contribution will have to be a traditional? Thanks!
My wife contributes to a 401(k) through her employer. I’m self-employed and make the max contribution to my traditional IRA to reduce my tax burden as much as possible. Since I contribute the max to my traditional IRA, I can’t contribute to a Roth. Can my wife open a Roth and make the max contribution?? Our MAGI is less than $183K.
G.E.
Can you contribute a 2012 prior year deposit to an IRA that wasn’t opened until 2013.
Thanks
You can make 2012 contributions (either Roth or Traditional) up through April 15, 2013. This is the case whether you have an existing account or are opening a new one for the first time.
Don’t forget that the income limits are waived if the employer does not offer a retirement plan
Just filed my fed & state taxes a week ago online. I’ve been funding my 401k, but I really need to start a Roth IRA. What’s the best way to take advantage of the 2012 contribution? I have the available cash to do a full contribution.
Do I need to file an amended return? I did owe some additional tax and I have paid it already.
Thanks in advance! Great website!
A Roth IRA contribution is not deductible so no you would not need to amend your return. Roth contributions are made with “after-tax” dollars and are tax free upon withdrawal (including earnings) upon reaching retirement age.
A contribution for 2012 must be done by April 15, 2013. For example, you can contribute 10,000 right now (by Monday) with $5,000 designated as 2012 and $5,000 designated as 2013. Of course you can wait until later in the year or by April 15, 2014 to make the 2013 contribution.
Do I understand this correctly……. I have had a ROTH Ira with Ameritrade for about 8 years now. I have been buying and selling stocks out of this account. Sometimes I buy and sell the same stock as many as 4 times in a month making money. I never take money out of the account so I do not have to pay short / long term capital gains or taxes on any of this money……when I am 59 1/2 its all mine tax free. Is this correct?
Yes Mark this is correct, all earnings within a Roth are tax free upon distribution at retirement age provided you have had the Roth account for 5 yrs.
Great article. I’ve tried to explain the benefits and details of each type of IRA for my Mom but this article is great and I’ll be sending this over to her. Thanks!