How To Pay Taxes on a Roth IRA

Learn how taxes affect this retirement account

Older couple doing financial planning at home
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A Roth IRA is a kind of individual retirement arrangement that works differently from other types of IRAs. With a traditional IRA, you make contributions tax-free, paying the taxes when you take out money. For a Roth IRA, however, you use after-tax money to fund the retirement account, and you don’t have to pay taxes when you withdraw money.

Learn more about taxes on Roth IRAs in most common situations, and how taxes work for contributions, withdrawals, and transfers.

Key Takeaways

  • In most situations, you don’t have to pay taxes when you take money from your Roth IRA, because you made contributions with after-tax money.
  • Contributions are limited to a specific amount depending on your taxable income for the year.
  • You can take withdrawals at any time, but you may have to pay additional tax if you are under age 59 ½ and you haven’t had your Roth IRA at least five years.
  • You can convert a traditional IRA to a Roth IRA, but a Roth IRA can only be converted to another kind of Roth account.

How Roth IRA Taxes Work

You can open a Roth IRA by setting up an account with a financial institution or brokerage. You then can contribute money to the account each year. Your contributions must be made with after-tax funds. When you take out the funds from the Roth, you don’t have to pay any taxes. You can leave the money in the account as long as you like.

However, there are some qualifications and restrictions on contributions and withdrawals that affect your taxes.

Taxes on Roth IRA Contributions

You can only contribute to Roth IRAs and other types of IRAs to a total amount each year. You can make contributions if you have taxable compensation and your modified adjusted gross income (MAGI) is less than $208,000 for a married couple filing jointly or $140,000 for a single or head of household individual.

If your MAGI is above a certain amount, your contribution limit may be reduced. Then you can only contribute up to the lesser of:

  • $6,000 ($7,000 if you are age 50 or above) or
  • Your taxable compensation for the year

The annual limit on retirement plan contributions applies to a total of all Roth IRAs and traditional IRAs, but not to SEP IRAs or SIMPLE IRAs.

The Internal Revenue Service (IRS) penalizes excess contributions (contributing over the limit for the year). If you contribute too much to your Roth IRA in a year, you may have to pay a 6% excise tax on the extra amount. But you may be able to apply the excess contribution from one year to a later year if the contributions for that later year were less than the maximum.

Taxes on Roth IRA Withdrawals

You aren’t required to take withdrawals from your Roth IRA at any time during your lifetime. That means you don’t have to take a required minimum distribution (RMD) from your Roth account at age 72 (70 ½ if you reached this age before January 1, 2020).

Withdrawals from a Roth IRA are usually tax-free because you paid the taxes when you made the contributions to the plan. But Roth distributions must meet certain qualifications to avoid paying taxes and penalties on the distribution amount.

To avoid penalties, distributions must be made:

  • Five years or more after your first tax year of having the account
  • On or after you reach age 59 ½

If you take a distribution before age 59 ½, you may have to pay an additional 10% tax on these early distributions.

There are, however, some exceptions to these requirements:

  • There’s no penalty if the distribution is to your beneficiary or your estate after your death.
  • If you become disabled before age 59 ½, you don’t have to pay the additional 10% tax penalty for withdrawals. You must furnish proof of your disability from a physician.
  • You can withdraw money from your Roth IRA before age 59 ½ to use for buying your first home. Your total qualifying distributions must be $10,000 or less for costs of buying, building, or rebuilding the home, including settlement, financing, and closing costs.
  • If you suffered a loss from being in a declared disaster area, you may be able to take a distribution from your Roth IRA. The distribution may be taxable, but you may be able to avoid penalties.

The regulations for qualified distributions from Roth IRAs are complex, and they frequently change. Before you take a distribution from your Roth IRA, talk to your broker and a licensed tax specialist to review the tax implications.

How To Pay Taxes on a Roth Conversion

You may be considering moving your Roth IRA to another type of retirement plan or from an IRA to a Roth IRA. This is called a rollover or conversion. Some conversions aren’t allowed, while others have tax effects.

You can convert a traditional IRA to a Roth IRA. However, since no tax has been paid on the traditional IRA, you must include the untaxed amount in your gross income from the year. You may also have to pay the 10% early withdrawal tax on these amounts, or they may be treated as excess contributions, with penalties applied.

You can only transfer a Roth IRA into another Roth IRA, but you can transfer a Roth 401(k) from an employer retirement plan into an individual Roth IRA. In this case, the tax has already been paid, so there’s no taxable effect.

You can only make one rollover during any 12-month period from an IRA to another IRA of any kind, including a Roth IRA.

Frequently Asked Questions (FAQs)

How does having a Roth IRA affect your tax return?

There is usually no tax effect if you withdraw money from your Roth IRA, because you already paid the taxes. However, you must meet certain qualifications to make a tax-free withdrawal. If you are under age 59 ½ or you haven’t waited at least five years to make your first withdrawal, you may have to pay an additional 10% penalty.

When you make a Roth IRA withdrawal, you’ll receive a Form 1099-R from your brokerage firm showing the amount of the withdrawal, any tax you withheld, and whether the distribution is taxable. Give this form to your tax preparer to include in your tax return.

What are the tax benefits of a Roth IRA?

One key tax benefit of a Roth IRA is that you can time withdrawals to your advantage and without penalty, as long as you take them after age 59 ½ and more than five years after you make your first contribution, or for specific exceptions. You don’t have to take required minimum distributions (RMDs) after age 72 (70 ½ if you reached this age before January 1, 2020), so you can leave as much as you want in your account for your beneficiaries.

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