What is a Roth IRA?
A Roth IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. The 2020 Roth IRA contribution limit is $6,000 and $7,000 for those age 50 or older.
A Roth IRA offers some unique tax advantages compared to other retirement accounts since contributions are not tax deductible, but withdrawals after age 59 ½ are tax free. Some of the investments that may be selected inside a Roth IRA are mutual funds, stocks, bonds and CDs.
I am single and contribute to a 401k plan through my employer. Am I eligible to contribute to a Roth IRA?
In 2020, as a single tax filer you can make a full contribution to a Roth IRA if your income is less than $124,000.
n 2020, as a single tax filer you can’t contribute fully to a Roth IRA if your adjusted gross income exceeds $124,000. If you file as single or head of household and your earned income is somewhere between $124,001 and $139,000 your 2020 Roth IRA contribution limit is reduced and phases out.
If you are a single filer or head of household and you earn more than $139,000 then you are not eligible to contribute to a Roth IRA in 2020.
I am married and file my taxes jointly with my spouse. I contribute to a 401k plan through my employer. Am I eligible to contribute to a Roth IRA?
In 2020, if you are married filing jointly with your spouse you can make a full contribution to a Roth IRA if your income is less than $196,000.
In 2020, if you are married filing jointly you can’t fully contribute to a Roth IRA if your adjusted gross income exceeds $196,000. If you are married filing jointly and your earned income is between $196,001 and $206,000 your 2020 Roth IRA contribution limit is reduced and phases out.
If you are married filing jointly and you earn more than $206,000 then you are not eligible to contribute to a Roth IRA in 2020.
Roth IRA Features
- Contributions to a Roth IRA are not tax deductible. However, there are other advantages and tax benefits.
- The unique feature of a Roth IRA is dividends and investment earnings grow tax-free within a Roth IRA. This means you won't have to pay federal income taxes or state taxes in most states, if you make withdrawals after age 59 ½. This is unique compared to other retirement accounts since money can be withdrawn tax free.
- Contributions can be withdrawn tax-free and without penalty at any time. This does not apply to the dividends and investment earnings.
- Withdrawals are not required to start when you reach age 70 ½. The IRS requires that investors take distributions beginning at age 70 ½ for other retirement plans. For some investors who want to transfer assets to family members or investors with estate planning issues this can be a great retirement option.
- Dividends and investment earnings may be withdrawn tax and penalty free after the Roth IRA account has been opened at least five years provided the withdrawal meets one of the following qualifying conditions:
(1) The owner is 59 ½ or older.
(2) The owner is disabled.
(4) First time home purchase up to a $10,000.
(5) Qualified higher-education expenses.
(6) Qualified medical expenses exceeding 10% of AGI or 7.5% of AGI if age 65 or older.
(7) Payment of health insurance premiums while unemployed.
When can I make withdrawals from my Roth IRA?
Contributions can be withdrawn at any time. Earnings may be withdrawn tax free provided the account has been opened at least five years and one of the above listed qualifying conditions has been met.
Who should have a Roth IRA?
Anyone who would like to maximize their retirement contributions. Investors with income above a certain threshold may not be permitted to contribute to a Roth IRA.
What are the disadvantages of a Roth IRA?
Relatively low contribution limits and contributions are not tax deductible.
When must I take distributions from my Roth IRA?
There are no IRS requirements on when you must start taking withdrawals from your Roth IRA.
In addition to contributing to a Roth IRA, sole proprietors should also consider an Individual 401k, SEP IRA, Defined Benefit Plan and a SIMPLE IRA. Learn more about these retirement plans available to a Sole Proprietorship.