5 Frequently Asked Questions About Roth IRAs

How Does a Roth IRA Differ From a Traditional IRA?

Roth accounts offer one of the only ways you can grow money tax-free. At the link above you can learn more about how a Roth IRA differs from a traditional IRA.

The Roth retirement account is designed to help individuals save for retirement and eliminate any taxes owed when funds are withdrawn. 

The only downside to a Roth is that you can't contribute more. There is a maximum allowable contribution amount—and unfortunately, if your income is too high you can't make a Roth IRA contribution—although you may be able to contribute to a Roth Account through your 401(k) plan, and at any income level, you can convert a traditional IRA to a Roth.

Who Is Eligible to Contribute to a Roth and How Much Can You Contribute?

Wondering how much you can contribute to a Roth IRA or if you make too much to contribute?

You have to have earned income to contribute (if married as long as you have enough earned income you can make a spousal Roth contribution even if your spouse has no earned income.)

And if you have too much earned income, you can't contribute to a Roth IRA - although you may still be able to contribute to a Roth 401(k) or use a Roth conversion.

The rules and limits change a bit each year. Be sure to research the latest Roth IRA contribution limits and earned income rules.

Are Roth IRA Withdrawals Tax-Free?

There's a mass of messy information out there about Roth IRA withdrawals. The bottom line is most of the time your Roth IRA withdrawal will be tax-free.

The exception to tax-free withdrawals: income earned on investments inside the Roth may be taxable if you take a non-qualified withdrawal. And amounts you converted to a Roth from a traditional retirement plan may be subject to taxes if you take the money out too soon after conversion. Find the specifics at the link above.

Also note—unlike traditional IRAs, regardless of age, you are not required to take distributions from a Roth. You can leave the account to grow and pass it along to your heirs tax-free.

If you decide to take a distribution before age 59 1/2, or before you have had the Roth at least five years, read the withdrawal rules carefully to see if you'll owe tax on any portion of the withdrawal. If you are disabled or paying for first-time home-buyer expenses you'll likely qualify for an exception to any early withdrawal penalty taxes.

What Is a Roth Conversion and Should I Do It?

With a Roth conversion, you take a withdrawal from a traditional IRA or 401(k) and convert it to a Roth. You'll pay ordinary income taxes on the withdrawal amount but not early withdrawal penalty taxes.

A Roth conversion makes sense for many folks who want their money to grow tax-free. At the link above you'll learn the five questions to ask to see if a conversion might make sense for you.

The five questions will be a useful resource if you are considering evaluating the benefits of a Roth conversion on your own. If you have a financial advisor or tax expert to lean on, consider having a second set of eyes double check your calculations.

What Are the Differences Between Roth 401(k)s, Regular 401(k)s, and Roth IRAs?

More and more employers are offering the option to contribute to a Designated Roth account through their employer-sponsored 401(k) plan.

The great thing about this is you can contribute an amount up to the 401(k) salary deferral limit - which is a much larger amount than the Roth IRA maximum contribution limit. 

Encourage your employer to offer a Roth option in the 401(k) plan. You can even contribute half to the traditional deductible 401(k) and half to the Roth.

At the link above you can read up on the differences between Roth 401(k) accounts, traditional 401(k) accounts and Roth IRAs.