Grow Your Retirement Savings Tax-Free: The Benefits of Roth IRAs

Roth IRA: Key Takeaways

1. Tax-Free Withdrawals:

   • Roth IRAs allow tax-free and penalty-free withdrawals for qualified distributions.
   • Unlike traditional IRAs, where withdrawals are taxed, Roth IRAs offer tax advantages.

2. Contribution Limits:

   • The combined annual contribution limit for traditional and Roth IRAs is $6,500 (or $7,500 if you’re 50 or older).
   • This limit applies to both types of IRAs combined.
   • If you earn $161,000 or more as a single taxpayer, or $240,000 or more as a married-filing-jointly taxpayer, then you can't contribute anything directly to a Roth IRA in the 2024 tax year.

3. Income Limitations:

   • Roth IRA contributions are phased out for higher-income earners.
   • Verify your eligibility based on your modified adjusted gross income (MAGI).

4. No Required Minimum Distributions (RMDs):

   • Unlike traditional IRAs, Roth IRAs have no mandatory withdrawals after a certain age.
   • You can leave funds in your Roth IRA indefinitely if you choose.

5. Conversions from Traditional IRAs:

   • You can convert funds from a traditional IRA to a Roth IRA, but taxes apply to the converted amount.
   • Consider tax implications before making conversions.

6. Recharacterizations:

   • You can recharacterize contributions from traditional IRAs to Roth IRAs within the same year.
   • This allows for tax-free treatment if you change your mind.

7. Age Limit for Contributions:

   • 2020 and later: No age limit for regular contributions to traditional or Roth IRAs.
   • 2019: Individuals aged 70½ or older cannot make regular contributions to traditional IRAs.
8. Deadlines:
• Roth IRA contributions: You can contribute to your Roth IRA for a tax year until the tax filing deadline for that year, including extensions. This means you can potentially contribute to your 2023 Roth IRA until April 15, 2024.
• Roth conversions: Conversions from traditional IRAs to Roth IRAs must be completed by the end of the calendar year. So, to convert funds for the 2023 tax year, the conversion must be completed by December 31, 2023.
9. Earned Income Key to Roth IRA Contributions: 
• To contribute to a Roth IRA, you or your spouse must have earned income (typically W-2 box 1— total earned compensation minus retirement contributions). Your contribution is capped at the lower of your earned income or the annual limit ($6,500/$7,500 in 2023).

10. No Limit on Roth Conversions, But Taxes Apply: Unlike Roth IRA contributions, there is no maximum limit on the amount you can convert from a traditional IRA to a Roth IRA. You can convert your entire traditional IRA balance to a Roth IRA, if you wish. However, it's important to remember that the converted amount will be taxable as income in the year of the conversion.

11. Additional Points:

    • Contributions to Roth IRAs are not tax-deductible.
    • Qualified distributions require holding the account for at least five years and reaching age 59½.
    • Roth IRAs allow contributions even after retirement if you have earned income.

Remember to consult a financial advisor for personalized guidance based on your specific situation. 

Roth IRA Flowchart: Navigating Your Options 

Start: Do you or your spouse have earned income?

Yes:

• Do you have any income restrictions based on your modified adjusted gross income (MAGI)?
  • Yes: Check the IRS guidelines to see if your MAGI exceeds the limits for Roth IRA contributions. If it does, you may not be eligible to contribute this year.
    • Exceeds limits: You may not contribute to a Roth IRA this year. Explore other retirement savings options.
    • Under limits: Proceed to "Contribution Amounts"
  • No: You do not have income restrictions for Roth IRA contributions. Proceed to "Contribution Amounts"

No: You are not eligible to contribute to a Roth IRA.

Contribution Amounts:

• Are you under 50 years old?
  • Yes: The maximum annual contribution for 2024 is $7,000.
  • No: The maximum annual contribution for 2024 is $8,000.

Combined Contribution Limits:

• Do your combined contributions to both traditional and Roth IRAs exceed the annual limit?
  • Yes: You cannot contribute to your Roth IRA this year.
  • No: You can contribute up to the remaining limit based on your age and contribution type (regular or conversion).

Regular Contribution or Conversion:

• Are you contributing new money?
  • Yes: This is a regular contribution, limited by the annual amount and income restrictions (if applicable).
  • No: This is a conversion from a traditional IRA, which may have tax implications. Consult a tax professional.

Taxability of Distributions:

• Did you wait at least 5 years since your first Roth IRA contribution and are you at least 59.5 years old?
  • Yes: Qualified distributions are tax-free and penalty-free.
  • No: Distributions may be taxed and subject to penalties.

Early Withdrawals:

• Did you meet the eligibility requirements for a qualified distribution (5 years + 59.5 years old)?
  • Yes: You can withdraw contributions at any time without taxes or penalties.
  • No: Early withdrawals of earnings may be taxed and subject to a 10% penalty.

Required Distributions:

• Are you over 72 years old?
  • Yes: RMDs are only applicable to traditional IRAs, SEP IRAs, and SIMPLE IRAs. Individuals owning these types of accounts must begin taking minimum withdrawals by April 1st of the year following the year they turn 72 (73 for individuals born after December 31, 2022).
  • No: You are not required to take minimum distributions from either Roth IRA or any of the above-mentioned IRAs.

Eligibility:

• Are you a US citizen or permanent resident with earned income?
  • Yes: You are generally eligible to contribute to a Roth IRA.
  • No: You may not be eligible. Consult a tax professional.

Excess Contributions:

• Did you contribute more than the allowed limit?
  • Yes: You may have to withdraw the excess amount and pay a 6% penalty.
  • No: You are okay.

Traditional IRA Conversions:

• Do you have a traditional IRA?
  • Yes: You can convert funds to a Roth IRA, but taxes may apply. Consult a tax professional.
  • Read [2] to decide if a Roth IRA conversion right for you
  • No: You cannot convert to a Roth IRA.

Improper Conversions:

• Did you convert funds in error?
  • Yes: You may be able to recharacterize the conversion within a specific timeframe. Consult a tax professional.
  • No: You may have to pay taxes and penalties.

Other Contribution Methods:

• No: You cannot contribute in other ways.

Recharacterization:

• Did you contribute to a traditional IRA within the last 60 days?
  • Yes: You may be able to recharacterize it as a Roth IRA contribution. Consult a tax professional.
  • No: You cannot recharacterize.

Disclaimer: This flowchart is for informational purposes only and does not constitute tax or financial advice. Please consult with a qualified professional for specific guidance.

Watch This Before Roth Converting in 2024 (YouTube link)

References

1. Retirement Plan and IRA Required Minimum Distributions FAQs
2. Is a Roth IRA conversion right for you?