Retirement and College Savings Plans - Roth IRAs


The Roth IRA was introduced by the Taxpayer Relief Act of 1997. This Act essentially allows investors to contribute to a form of IRA called a Roth IRA, in which contributions are not tax-deductible. Instead, an investor can withdraw funds from a Roth IRA tax-free after five years of ownership, and only under certain circumstances outlined by the IRS. Moreover, RMD rules do not apply to the Roth IRA.

Roth IRAs have a very different tax structure than Traditional IRAs. While the contributions are notdeductible, the earnings may be withdrawn tax free (rather than tax-deferred) if the following conditions are met:

  • Withdrawals do not occur until the account has been open at least five years
    AND
  • Withdrawals do not occur until the Roth IRA owner reaches age 59.5

This is a very powerful vehicle because virtually all other retirement accounts only offer tax deferral on the earnings. However, income limits do apply. The chart below shows the maximum amount of income permitted to make the full contribution, as well as the phase-out income range for a partial contribution:

Filing Status Full Contribution Partial Contribution
Single or Head of Household Up to $95,000 $95,001-$109,999
Married Filing Jointly Up to $150,000 $150,001-$159,999


In 2005, an investor could contribute up to $4,000 to a Roth account. This amount increased to $5,000 in 2006-2008, and will then increase increments of $500 per year thereafter. There are certain income limitations on Roth IRAs. A single person with an AGI of $95,000 or less can contribute to a Roth IRA; this person's ability to contribute to the Roth is gradually phased out between $95,000 and $110,000. The AGI limit for married couples filing jointly is $150,000 or less, with the gradual phase-out for incomes between $150,000 and $165,000. It does not matter if the investor participates in an employer-sponsored retirement plan, as anyone is eligible for a Roth IRA.

The following information applies to Roth IRAs only:

  • Contributions are permitted after age 70.5 (assuming there is earned income).

  • There are no mandatory minimum required distribution rules at any age.

  • Withdrawals are made on a FIFO basis (first in, first out), so any withdrawals made come from contributions first. Therefore, no earnings are considered withdrawn until all contributions have been withdrawn.

  • Withdrawals of contributions are not taxable or penalized, even if they are made before age 59.5 or before the account has been open for five years.

  • Withdrawals of earnings are taxed but not penalized under the same exceptions listed for Traditional IRAs.

The Roth IRA is arguably the IRA with the most potential tax advantage. Find out why in the Roth IRAs tutorial.

Although Roth IRAs have excellent tax benefits, it's important to make sure the client meets the eligibility requirements. The Roth IRA: Back to Basics article holds more information.

In some cases it is beneficial to split contributions between Roth and Traditional IRAs, depending on the client's needs. Read more about the deductions and tax credits associated with IRAs within the IRA Contributions: Deductions And Tax Credits article.

Note that in some cases either the Roth or Traditional IRA will be more beneficial for a client than a combination of both. In order to answer this question in detail, you need to consider several factors outlined within theRoth Or Traditional IRA... Which Is The Better Choice? article.

IRA Rules and Regulations
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