Contributions to a Roth IRA,unlike those made to a Traditional IRA, are not tax-deductible. However, all withdrawals are tax-free.
The parameters for eligibility are the same as for the Traditional IRA. You have to have earned income to open a Roth IRA.
The eligible forms of compensation that have been specified by the IRS for contributing to a Roth IRA are:
- Job salary, wages, commission payments, tips and bonus payments
- Income earned from self-employment
- Received payments from Alimony awards
- Combat pay (non-taxable)
The types of payments that are not eligible for Roth IRA retirement plan compensation are:
- Annuity income
- Child support
- Capital gains, interest and dividend income
Unlike a Traditional IRA, a Roth IRA allows making contributions at any age.
Contribution Limits to Roth IRA
Roth IRA maximum contributions are equal to the lesser of 100% earned income or $5,500.
An additional $5,500 may be contributed by a spouse who is employed, provided the IRA holder is currently unemployed or has been designated as a “low-income” earner.
An individual may make contributions to both a Roth IRA and a Traditional IRA. But the maximum aggregated contributions are not authorized to exceed a $5,500 limit, or if the contributor is 50 years of age (or older) the limit is $6,500.
Any individual that has an income that is eligible can open a Roth IRA provided that their Adjusted Gross Income (AGI) falls below a pre-determined income level.
|2016 Tax Year|
|Married Filing Jointly or Qualified Widow (er)||$184,000 and $194,000|
|Single, Head of Household or Married Filing Separately (and you did not live with your spouse at any time during the year)||$117,000and $132,000|
|Married Filing Separately (and you lived with your spouse at any time during the year)||$0 and $10,000|
The lower number is an annual income level of which the taxpayer may contribute up to $5,000. The upper number represents the annual earnings level as of which the taxpayer is not allowed to contribute at all. If the income is in the range, then the contribution is reduced proportionally.
You can find how your AGI is determined by checking out the first page (bottom) of the taxpayer Form 1040.
Since the contributions have been made after tax has been removed, there is no tax assessed to regular contribution withdrawals that are made at any time. But capital gain and income accumulations can only be withdrawn, tax-free, after a 5-year period has passed after the initial deposit.
Once of the differences between a Traditional IRA and a Roth IRA is that the distribution of retirement funds from an individual’s Roth IRA doesn’t have to proceed upon reaching the age of 70 ½.
Early withdrawals of capital gain and income accumulations from a Roth IRA will incur a penalty tax of 10% if the individual has yet to reach the age of 59 ½.
The 10% early distribution withdrawal penalty will not be applied in circumstances relating to:
- The owner of the account has reached the age of 59 ½ (or older)
- The individual’s death or disability
- Immediate family member’s qualified education expenses
- Qualified medical expenses that exceed 7.5% of their AGI
- First-time home buyer ($10,000 lifetime maximum)
As with a Traditional IRA, a penalty tax (6%) is assessed to any excess contributed funds above the maximum allowed, that haven’t been removed. That penalty is assessed at the time that the investor files their tax return (but not later than April 15