Roth IRA Summary

  • The distinguishing feature of Roth IRAs is that contributed assets can grow and be withdrawn totally tax-free.
  • Contributions to a Roth IRA may be made for any year in which an individual had earned income
  • Contributions to a Roth IRA can be made even after age 70 ½.
  • A Roth IRA can be funded with your own contributions, spousal contributions, transfers, rollovers, conversions, and reconversions.
  • You can leave amounts in your Roth IRA to continue to grow tax -free as long as you live (no RMDs).
  • A Roth IRA must be established with an institution – such as a bank, brokerage or other qualified custodian – that has received IRS approval to custody IRAs.

Roth IRA Detailed Overview

Contributions to a Roth IRA

The Roth IRA is a retirement saving account to which individuals can make contributions with after-tax dollars, which are then invested and distributed completely tax-free. The annual contribution limit for 2017 is $5,500, or $6,500 for those aged 50 or older.

You can contribute to a Roth IRA if you have taxable compensation and your modified AGI is less than:

  • $194,000 for married filing jointly or qualifying widow(er),
  • $132,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year

Contributions for a tax year must be made by the IRA owner’s tax-filing deadline, not including extensions.

Tax-Deductibility of Roth IRA Contributions

Roth IRA contributions are not tax-deductible, but rather have the benefit of growing completely tax-free. The tax treatment of Roth IRAs is unaffected by active participation in an employer-sponsored retirement plan.

Roth IRA Funding Methods

A Roth IRA can be funded from several sources:

  • Regular contributions
  • Spousal IRA contributions
  • Transfers
  • Rollover contributions
  • Roth Conversions
  • Roth Reconversions

A Roth conversion is a movement of assets from a Traditional, SEP or SIMPLE IRA to a Roth IRA. Taxes are paid on the amount of pre-tax funds being converted to Roth funds.

A Reconversion is a second conversion, following a Recharacterization, from a non-Roth IRA to a Roth IRA. You cannot reconvert the amount recharacterized to the same or another Roth IRA until the later of:

  • 30 days after the recharacterization, or
  • the year following the year of the rollover or conversion.

The waiting period to reconvert applies only to amounts that were previously recharacterized.

Roth IRA Qualified Distributions

All asset growth within a Roth IRA, including dividends and capital gains, may be distributed totally tax free as Qualified Distributions. Nonqualified distributions may be subjected to taxes and an early distribution penalty on amounts in excess of the taxpayer’s basis in the account.

A qualified distribution is any payment or distribution from your Roth IRA that is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution is made on or after the date you reach age 59½.

Required Minimum Distributions for Roth IRAs

The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive and you are not required to take distributions from your Roth IRA at any age. However, after the death of a Roth IRA owner, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner’s death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.