Roth IRA

Loading the player...

What is a 'Roth IRA'

A Roth IRA is an individual retirement plan that bears many similarities to the traditional IRA, but the contributions are not tax deductible and qualified distributions are tax free. Similar to other individual retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.

BREAKING DOWN 'Roth IRA'

A qualified distribution is one that is taken at least five years after the taxpayer establishes his or her first Roth IRA and when he or she is age 59.5, disabled, using the withdrawal to purchase a first home (limit $10,000), or deceased (in which case the beneficiary collects). Since qualified distributions from a Roth IRA are always tax free, some argue that a Roth IRA may be more advantageous than a Traditional IRA.

Named for Delaware Senator William Roth, the Taxpayer Relief Act of 1997 established the Roth IRA. As of the end of 2015, investors held $660 billion in Roth IRA accounts, roughly 9% of total IRA assets.

Eligibility Requirements

Eligibility to contribute to a Roth IRA and permitted contribution amount depends on the individual's tax filing status and modified adjusted gross income (AGI). For 2016, single filers with an AGI under $117,000 can contribute up to the full $5,500 limit ($6,500 for those age 50 or older). Single filers with an AGI over $132,000 are ineligible to make a Roth IRA contribution, while those with an AGI between those two levels can make partial contributions. Married couples filing jointly can make full contributions if the AGI is under $184,000, and those making more than $194,000 are ineligible to contribute.

Who Benefits the Most

Whether or not a Roth IRA is more beneficial than a traditional IRA depends on the tax bracket of the filer, the expected tax rate at retirement and personal preference. Individuals who expect to be in a higher tax bracket in retirement may find the Roth IRA more advantageous since the total tax avoided in retirement will be greater than the income tax paid on the contribution amount in the present. Therefore, younger and lower-income workers may benefit the most from the Roth IRA.

Even those who expect a lower tax rate in retirement can find benefit with the Roth IRA. Many investors simply prefer a tax-free income stream in retirement. The Roth IRA also allows an individual to pass on assets to heirs tax-free upon his death. Required minimum distributions are not a consideration with the Roth IRA. Those who don't need Roth IRA assets in retirement can leave the money to accrue indefinitely. As long as the individual has earned income, he can make contributions to the Roth IRA at any age.

RELATED TERMS
  1. Roth IRA Conversion

    A reportable movement of assets from a Traditional, SEP or SIMPLE ...
  2. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  3. Ordering Rules

    The order in which Roth IRA assets are distributed. Assets are ...
  4. Qualified Distribution

    Distributions made from a Roth IRA that are tax and penalty free. ...
  5. IRS Publication 590: Individual ...

    A document published by the Internal Revenue Service (IRS) that ...
  6. Non-Qualified Distribution

    1) A distribution from a Roth IRA that occurs before the Roth ...
Related Articles
  1. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  2. Financial Advisors

    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.
  3. 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.
  4. Taxes

    An Introduction to Roth IRAs

    Be sure to consider the tax benefits and the eligibility requirements of the Roth IRA.
  5. Savings

    Why Now Is The Time For A Roth IRA

    Legislative changes in recent years make Roth IRAs worth a second look.
  6. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  7. Retirement

    5 Reasons to Convert a Roth To a Traditional IRA

    Here's a quintet of cases when the traditional IRA trumps the Roth version.
  8. Retirement

    Roth IRAs: Investing And Trading Do’s And Don’ts

    Just what can you invest in in a Roth IRA? And what constitutes a prohibited transaction?
  9. Retirement

    Roth 401(k) Vs. Roth IRA: Which One Is Better?

    It all depends on your age, your income - and your plans for your retirement nest egg.
  10. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
RELATED FAQS
  1. Can an individual contribute to both a Roth IRA and a Traditional IRA in the same ...

    Yes, an individual can contribute to both a Roth IRA and a Traditional IRA in the same year. The total contribution into ... Read Answer >>
  2. What are the advantages of a Roth IRA?

    Contribute to your Roth IRA and gain the advantage of it free of taxes and penalties. Make approved early withdrawals to ... Read Answer >>
  3. Can I still contribute to my Roth IRA if my spouse earns over the requirement cap?

    My spouse makes over the amount allowed to contribute to a Roth IRA. However, I do not. Is it possible... Read Answer >>
  4. When you have opened up a backdoor Roth IRA can you make regular monthly contributions ...

  5. What is the difference between a ROTH, SEP and Traditional IRA?

    The Roth IRA was established in 1996 as the newest addition to the individual retirement accounts (IRAs) available to individuals. ... Read Answer >>
  6. Can you make catch-up contributions to a Roth IRA?

    Learn about the age and income requirements that you must meet so you are eligible to make a catch-up contribution to your ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center