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Roth IRA Basics, In a Question & Answer Format

Last updated by on May 11, 2016

Roth IRA’s have become quite popular among the millennial generation (and beyond) and can be a great addition to your retirement savings arsenal. But Roths bring a lot of questions with them, so I wanted to create a question and answer style article to address the most popular questions and basics.

This post covers the 2016 calendar tax year. Even if you are past a calendar year, it may still not be too late to contribute to IRA’s. You can contribute to your Roth IRA for the previous calendar year up until the tax deadline.

I’ll cover most of the basics here, but you you may also want to check out the IRS Roth IRA page for more particulars, particularly those related to tax issues.

What is a Roth IRA?

A Roth IRA is a tax-advantaged individual retirement account (individual retirement arrangement, according to the IRS). They were first allowed in 1998 and have grown very popular, particularly among younger investors, due to their promised future tax benefits. Roths are not an investment, rather they are a type of investment account that allows you to buy, sell, or hold just about 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 Roth IRA accounts. You can open one just like any other investment account. And you can have multiple accounts.

Once created, can I move my Roth IRA from one broker to another?

Yes. Just reach out to the broker that you would like to move your IRA to, and they would be happy to help initiate the transfer of funds.

Are Roth IRA contributions tax deductible?

No. Traditional IRA contributions are tax deductible, but Roth IRA contributions are not tax deductible.

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 (excluding early withdrawals). 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.

Which should you contribute to?

If you predict that your tax rate will be higher now than it will be in retirement, it may be to your benefit to contribute more to a Traditional IRA versus a Roth.

If you predict that your tax rate will be higher in retirement than it is now, it may be to your benefit to contribute more to a Roth IRA versus a Traditional.

And there is no reason why you can’t mix it up and contribute to both.

Roth IRAWhen can I withdraw Roth IRA contributions, tax and penalty free?

Since you already paid taxes on them, you can with draw Roth IRA contributions tax and penalty free at any time – although I wouldn’t recommend it unless it were a must – you’re robbing yourself of retirement funds!

When can I Withdraw Roth IRA earnings tax and penalty free?

Roth IRA earning distributions cannot be made without tax and a 10% penalty until age 59.5. Earnings must be held for a minimum of 5 years.

Are there any other times Roth earnings are tax and penalty free?

Yes, in the event of death, disability, or first time home purchase, Roth earnings can be tax and penalty free – within limitation. Check out the previously noted IRS article for more on eligibility.

Can I have a Roth and Traditional IRA at the same time?

Yes. You can have both a Roth and Traditional IRA account at the same time.

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, in total.

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 is the 2016 Roth IRA contribution limit?

The 2016 maximum Roth IRA contribution is $5,500.

How often do Roth IRA maximums increase historically?

IRA maximum do increase over time, as they are indexed to the consumer price index (CPI) – a measure of inflation. Here is the historical maximum Roth IRA contribution, over time.

Years:Maximum Contribution (age < 50)Maximum Contribution (age > 50)
1998, 1999, 2000, 2001$2,000$2,000
2002, 2003, 2004$3,000$3,500
2006, 2007$4,000$5,000
2008, 2009, 2010, 2011, 2012$5,000$6,000
2013, 2014, 2015, 2016$5,500$6,500

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 2016, the Roth IRA catch-up contribution is an additional $1,000 over the standard annual maximums.

What is the 2016 Roth IRA contribution deadline?

You can contribute up until the tax filing deadline in the following year. For the 2016 tax year, it will be April 17, 2017 (April 15 falls on a Saturday, so you get the weekend).

Can you make a Roth spousal IRA contribution?

Yes, spousal IRA contributions can be Traditional or Roth IRA contributions.

Is the new government myRA plan a Roth IRA account?

Yes. Contributions to myRA are post-tax. MyRA is a great way for new investors to start investing. The plan allows you to invest in inflation-protected government savings bonds with principal protection and no fees.

What are the 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 2016 Roth IRA income limits are:

  • Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $184,000 (up from $183,000) or less, you can contribute up to the $5,500 max. If at least $183,000 up to $194,000 (up $2,000), your contribution limit is phased out (see IRS publication 590). If $194,000 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 $117,000 (up from $116,000), you can contribute up to the $5,500 maximum. If at least $117,000 up to $132,000 (was $131,000), your contribution limit is phased out. If $132,000 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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  • Ted says:

    Two more positive facts about Roths I recently learned:

    (1) while there technically is an income limit on Roths, there is a loophole. An individual that exceeds the income limit can simply open a traditional IRA and then immediately convert to a Roth. You just need to remember that the deadline for opening a traditional Roth is December 31 (as opposed to April 15).

    (2) you can use the principal on a Roth — not gains — to pay for higher education expenses. If you don’t otherwise have a Roth, and want to create a college fund, the Roth is a good vehicle. Whereas a 529 plan restricts you to using the funds solely for college — and requires somewhat of a gamble on the part of the saver (e.g., that the market will not be down in the 4 specific years your kid attends college; your kid doesn’t receive a scholarship; your kid actually attends college; etc.) — the advantage of the Roth is that in the event you don’t actually use it to pay for college, you just utilize the Roth for your own purposes in retirement. In that regard, the Roth is a good way of diversifying the risk that comes with saving for college in a 529.

    • G.E. Miller says:

      On #1, depending on if you have a retirement plan through an employer, Traditional IRA’s also have income limits.

      • Greg says:

        I have a question about this loophole and the income limits. With the Traditional IRA, there does not appear to be an income limit on being able to contribute, just on whether you get a deduction. Does this mean that if you exceed the income limit for Roth, can you contribute to a Traditional, get no tax deduction, and then immediately convert to a Roth (at which point it doesn’t matter that you got no tax deduction since you have to pay taxes on the Roth income anyway)?

      • Rich says:

        Traditional IRAs only have income limits for the deductible eligibility. Doesn’t matter if you have a work retirement plan. You can make a non-deductible contribution to a traditional IRA at any income level, then immediately roll that money to a Roth IRA.

      • bill says:

        If you exceed the income limit range, you can make a non tax deductible CONTRIBITION to your IRA, e.g., $5,500 if under age 50 and $6,500 if >= age 50, and then CONVERT the $5,500 or $6,500 to your ROTH IRA with NO tax due BUT ONLY IF you have $0 of tax-deferred money in your ROTH IRA, i.e., a $0 balance. Also, remember the IRS considers ALL of your IRAs together as if your group of IRAs (if you have more than one) are just one IRA. If you have any tax deferred money in any of your Traditional IRAs then the CONVERSION is done on a pro-rata basis of tax-free vs. tax-deferred money and then you pay income tax on the tax-deferred portion that is CONVERTED. So if you have a $0 balance of tax-deferred money then you pay NO income tax. IF your MAGI is below the income limit range THEN you can ignore all this.

        • bill says:

          In line #4 omit the word ROTH in ROTH IRA
          I should have said IRA or Traditional IRA, i.e., a $0 balance.
          Sorry for the possible confusion.
          PS Open an ROTH IRA today if you don’t have one. You’ll be glad you did.

    • Steve says:

      But if you can’t use the gains in a Roth IRA on college, I don’t think it’s a smart vehicle to save money for higher education. In this case, it’s almost like a bank account that doesn’t generate interest. I realize that the principal is generating money for you during the time it’s not withdrawn to pay for college, but I still don’t really like this concept.

      You aren’t taxed on your principal in non-tax sheltered investments, and there’s no cap as to how much you can invest. If you’re concerned about putting money into a 529 since you don’t know you’ll actually use it for college, you’d be better off just putting the money in a non-tax sheltered account, and you’re safe both ways.

      • Ted says:

        “You aren’t taxed on your principal in non-tax sheltered investments, and there’s no cap as to how much you can invest. If you’re concerned about putting money into a 529 since you don’t know you’ll actually use it for college, you’d be better off just putting the money in a non-tax sheltered account, and you’re safe both ways.”

        Why are you safe both ways? I force myself to save money for 11k college (the principal on a roth conversion myself plus a roth conversion for my wife), and then have the added benefit of owing NO tax on any realized gains from that principal, which I WOULD owe if I’d simply stashed that money in a taxable account. Not saying this is a perfect strategy, but as I mentioned above, it seems to diversify the risk a 529 and provide some tax benefit. And the more I consider 529s, the less I like them.

    • Barbara says:

      I am just a little confused about this thread. I am probably over the inccome for the Roth IRA, but would love to know if I can actually open one through this loophole. I am maxed on my 401k contribution including a max on the catch-up. I am also maxed on my HSA contribution.
      (1) I am hearing from these conversations that if I open a traditional IRA with $6500 (including catch up allowance) and immediately convert to a Roth, it doesn’t matter what my MAGI is? (2) If the answer to #1 is yes, can this be taxed money from my savings? It’s confusing to know how the IRS will know that the taxed money that goes into trad IRA and then to a Roth IRA is not taxed twice.
      (3) So, now this traditional IRA has a $0 balance (because the money rolled-over to the Roth IRA), can I then put another $6500 into this traditional IRA account? The net result is that I have taken $13,000 of money from my savings and managed to put $6500 each into an IRA. Does this make sense or is this wishful thinking?

  • Anthony says:

    What’s the deal with converting a Traditional IRA (a rollover IRA in my case) to a Roth IRA? I know I’ll have to pay taxes on the account amount when I make the switch, but do the taxes get pulled from the account itself or would I be paying out of pocket?

    • Shawn says:

      Interested to know this as well…

      My employer has an option to contribute to a 401k plan with after tax money and just recently added a Roth option. I contributed about $20,000 into my company’s 401k with post tax money thinking it was a Roth to come to find out it never was…

      So, now am contributing to my employers pre-tax and Roth 401k options and am wondering how to rollover the post tax money I have into a Roth option so i can pay all my tax on that money in 2014 or 2015 and let it grow tax free.

  • Martin Rugh says:

    We are required to pay taxes on all types of income then why does the individuals who receive free income called Child Support are not required to pay.

  • David says:

    So if my income level is to high to contribute pre-tax dollars to a traditional IRA and I elect to contribute taxed income to a traditional IRA, why do I need to convert it to a Roth? When I start taking distributions after I retire the distributions will be tax free because taxes have already been paid. The only taxes you would possibly have to pay would be if the traditional IRA also had pre-tax dollars contributed, and your tax burden would only be on the pre-tax contributions. Is this correct?

  • Shane says:

    I opened a Roth IRA the later part of 2014 and have planned for steady contributions through February (to max out the 2014 $5,500 contribution limit). I am interested in starting my 2015 tax year contributions but I did not know if I can begin those now or if I need to wait until April 15, 2015 (as in can I contribute more than the $5,500 prior to the filing deadline even though I am interested in having that count towards my 2015 tax year contributions)? I am hoping to contribute consistently to utilize dollar-cost averaging and begin now for the 2015 tax year if possible.

  • vk says:

    Can i open a Roth IRA account before the 2015 April deadline and contribute money towards 2014 ?

    Every one i talk to says yes, but someone commented that the account has to be opened by dec31,2014 and contributions can be done before the april deadline. is this true ?

  • mike says:

    I also read that Roth must be open by Dec 31 to get the extended contribution time.

  • Vk says:

    Thanks Jason. I opened an Ira account, like u said they ask to which year to contribute to. Thanks for you reply..

  • mike says:

    The Bank is not the IRS.

  • Mike says:

    I’m 55 and late starter. I make $90k per year and will have to work at least until I am 65. What is better, a Traditional or Roth if I play the $6,500 catch up game? I just opened a traditional this morning at Fidelity but not sure if I should pay tax now or wait until I retire…..I do know that whatever investments I have will not put me into some high tax bracket when I retire, which was which is why I chose the traditional – so confusing. I

  • Ellie says:

    Do I have to file a tax return for 2015 if I want to make a Roth IRA contribution for 2015? I only earned $500 in 2015.

  • andre says:

    I have already filed my 2015 taxes, IRS and state.
    Is it too late to pay $6500 (over 50) to my Roth IRA account for 2015?
    today is April 8th, so I have 10 days?
    thx in advance

  • CJ says:

    Wondering if you could “hack” the system in a way. For example contribute to Roth IRA max of $6500 at the beginning of the year so that you gain the growth/interested/dividends (lets say 10% for the year for ease of round numbers, so $650 in growth which would then continue to grow tax free) and then withdraw the initial contribution of $6500 before the end of the year to then use that money to fully fund the traditional and get the tax advantage for that same year?? You technically stay within the total IRA limit by doing so.
    The concept would be to grow the roth in interest/dividends which would grow tax free for retirement while also getting the tax advantage now from the traditional.
    Has anyone done this or know the rules as to if this is possible.
    thanks in advance


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