This article has been updated for the 2022 and 2023 calendar years. Roth IRAs 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 2022 & 2023 tax years. Even if you are past a calendar year, it may still not be too late to contribute to IRAs (more on that below). And if you are interested in Roths, in general, check out my Roth 401K basics overview as well.
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, CDs, stocks, mutual funds, etc.
How can I start a Roth IRA?
Every online discount broker offers Roth IRA accounts. You can open one individually 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 IRA?
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 IRA differ from a Traditional IRA?
Contributions to Traditional IRAs are tax deductible at the time of contribution, however you must pay tax on your distributions in retirement. Contributions to Roths, 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.
When 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 are the 2022 & 2023 maximum Roth IRA contribution limits?
The 2022 and 2023 maximum Roth IRA contribution are both $6,000 and $6,500, respectively. While decent, this is far less than the max 401 contribution amount.
What is a Roth IRA catch-up contribution? How much is it in 2022 & 2023?
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 2022 and 2023, the Roth IRA catch-up contribution is an additional $1,000 over the standard annual maximum contribution.
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.
What is the Roth IRA contribution deadline?
The IRA contribution deadline for a calendar/tax year is the same date as the tax filing deadline, typically April 15 of the following year.
Can you make a Roth spousal IRA contribution?
Yes, spousal IRA contributions can be Traditional or Roth IRA contributions.
What are the Roth IRA Income Limits?
All good things have limits. It’s no different with Roth IRAs. Beyond certain IRA income limit thresholds, you can no longer contribute to a Roth IRA.
The 2022 Roth IRA income limits:
- Married filing jointly or qualifying widow(er): If your modified adjusted gross income (MAGI) is $204,000 (up from $198,000) or less, you can contribute up to the $6,000 max. If at least $204,000 up to $214,000 (up $6,000), your contribution limit is phased out (see IRS publication 590). If $214,000 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 $129,000 (up from $125,000), you can contribute up to the $6,000 maximum. If at least $129,000 up to $144,000 (was $140,000), your contribution limit is phased out. If $144,000 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 $6,000 maximum ($7,000 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA.
The 2023 Roth IRA income limits:
- Married filing jointly or qualifying widow(er): If your modified gross adjusted income (MAGI) is $218,000 (up from $204,000) or less, you can contribute up to the $6,500 max. If at least $218,000 up to $228,000 (up $14,000), your contribution limit is phased out (see IRS publication 590). If $228,000 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 $138,000 (up from $129,000), you can contribute up to the $6,500 maximum. If at least $138,000 up to $153,000 (was $144,000), your contribution limit is phased out. If $153,000 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 $6,500 maximum ($7,500 if over 50 years old). If $10,000 and above, you cannot contribute to a Roth IRA
What about the “Backdoor Roth IRA” if My Income Exceeds the Roth IRA Income Limits?
The Backdoor Roth IRA allows those over the Roth IRA income limit a back door (IRS loophole) to make Roth IRA contributions. If you are under the income limits, you don’t need it. If over, there are some serious risks and cautions involved that you should research beforehand.
What is a Mega Backdoor Roth?
Check out my mega backdoor Roth overview, but a mega backdoor Roth is a way for you to make after-tax contributions to a 401K, and then convert them to a Roth account – without having to worry about your income levels.
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