Roth IRAs are a popular choice for individuals looking to save for their future and take advantage of income tax-free withdrawals during retirement.
Why consider a Roth IRA?
Income tax-free withdrawals - You may qualify for income tax-free withdrawals if you meet certain requirements.
- Possible income tax credit - Individuals may qualify for an income tax credit based on the amount of their Traditional IRA contribution.
- Control - You control the timing and amount of any contributions.
Protect existing retirement savings - A Roth IRA may receive designated Roth contributions from 401(k) and 403(b) plans and keep those amounts growing tax-deferred.
Roth IRA Contribution Limits
The annual contribution limit is a combined limit that applies to all of the Traditional IRAs and Roth IRAs held by an individual. Contributions to an IRA cannot exceed the amount of earned income received during the year. The deadline for making a contribution for the previous tax year is your tax-filing deadline (usually April 15) and does not include any extensions.
Qualifying for a Roth IRA Contribution
If you or your spouse has self-employment or W-2 income for the tax year in which you would like to make a contribution, you are eligible to contribute to a Roth IRA. Unlike a Traditional IRA, contributions to a Roth IRA may be made after the age of 70½, as long as you or your spouse have earned income for the tax year in which you choose to make a contribution. The maximum contribution you can make per year is the lesser of your earned income or the stated contribution limit for a particular tax year.
Your ability to contribute to a Roth IRA is determined by both your tax-filing status and your modified adjusted gross income (AGI).
If your tax-filing status is single or head of household:
|Less than $116,000
||Less than $114,000
|At least $116,000 but less than $131,000
||At least $114,000 but less than $129,000
|$131,000 or more
||$129,000 or more
If you are married and file taxes jointly:
|Less than $183,000
||Less than $181,000
|At least $183,000 but less than $193,000
||At least $181,000 but less than $191,000
|$193,000 or more
||$191,000 or more
Qualifying for Income Tax-Free Withdrawals
If you meet certain requirements, you can withdraw funds from your Roth IRA without paying any additional income taxes. This is what separates the Roth IRA from other IRAs.
You must meet two qualifications to receive income tax-free withdrawals from a Roth IRA:
Your Roth IRA has been established for at least five tax years, beginning with the first tax year for which a contribution was made to a Roth IRA; and
You experienced one of the following:
Further Information about Withdrawals
At the time of a withdrawal, contributions are considered withdrawn before earnings, and contributions are not taxable when withdrawn.
Withdrawals of earnings that do not qualify for an income tax-free withdrawal will be subject to ordinary income tax.
A 10 percent premature distribution penalty may apply if you are less than 59½ years old.
You do not have to take mandatory distributions from a Roth IRA at age 70½, as you do with other IRAs.
Should you convert a Traditional IRA to a Roth IRA?
When you convert a Traditional IRA to a Roth IRA, you pay taxes now in exchange for the potential for income tax-free withdrawals during retirement. If you have funds available to pay the income taxes due on conversion, you may be better off converting to a Roth IRA, but you should consult your Modern Woodmen representative and your tax adviser about your individual circumstances.
If you would have to withdraw money from your Traditional IRA to pay the taxes due to a conversion or if you believe you will need funds from your Traditional IRA in the next five years, a conversion to a Roth IRA may not be right for you.