Roth IRAs have a very different tax structure than Traditional IRAs. Contributions are not deductible. However, earnings may be withdrawn tax-free (rather than tax-deferred) if the following conditions are met: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 ½

The Roth IRA is a very powerful vehicle, since virtually all other retirement accounts offer only 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

The following information applies to Roth IRAs only:

  • Contributions are permitted after age 70 ½ (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 Therefore, no earnings are considered withdrawn until all contributions have been withdrawn.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 neither taxable nor penalized - even if they are made before age 59 ½ 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. There are many similarities between the Roth and Traditional IRA but also some striking differences. The tutorial on Roth Individual Retirement Account examines, how it works, how to set one up, and even how to withdraw from it.

Coverdell Education Savings Accounts

Related Articles
  1. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
  2. Retirement

    Are You Too Old to Benefit from Opening a Roth IRA?

    You may not be too old to open a Roth IRA. Roth IRAs can offer significant retirement income security and tax advantages, even for older workers.
  3. Retirement

    Roth IRA Contribution Limits for 2017 Taxes

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  4. Retirement

    Traditional or Roth IRA: What's the Difference?

    Traditional IRAs and Roth IRAs have similarities and differences investors need to know.
  5. Retirement

    Roth IRA Contribution Rules: The Basics

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, deadlines to tax breaks.
  6. Retirement

    6 Reasons Not to Recharacterize Your Roth IRA

    If you're thinking of recharacterizing your Roth IRA into a traditional IRA account, here are six compelling reasons why you should reconsider.
  7. Retirement

    5 Secrets You Didn't Know About Roth IRAs

    Between its generous tax benefits at retirement and no required minimum distributions, a Roth IRA is well worth considering if you're eligible to have one.
  8. Financial Advisor

    Why Some Advisors are Shy to Convert Roth IRAs

    Potential upcoming changes from the Obama Administration could hit rollovers from traditional to Roth IRAs, and that has advisors reluctant to convert.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center