What is a Roth IRA?

How to make sense of a Roth IRA (Individual Retirement Account).

Savings jar
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A Roth IRA (individual retirement account) is one of the most exciting retirement planning opportunities currently available. Tax-free growth is a Roth IRA's most important benefit. Roth IRA considerations include:

Who Should Open a Roth IRA

A Roth IRA is particularly attractive to

    With opportunities for tax-advantaged growth limited, a Roth IRA is a great way to become financially independent by retirement.

    How and Where to Open a Roth IRA

    You can open a Roth IRA at nearly any bank or brokerage house, either in-person or online. Opening a Roth IRA is a very simple process, typically with help readily available. Often, there are just a few forms for you to complete. Bring your Social Security number with you as well as the Social Security numbers and addresses of any potential beneficiaries of your account.

    Earned Income and a Roth IRA

    The amount you are permitted to contribute to a Roth IRA is limited to your earned income. Earned income includes wages and self-employment earnings, but does not include interest or dividends. If you are married, your combined contribution limit is restricted to the total of your combined earned income.

    Contribution Limits for Roth IRAs

    For the 2016 and 2017 tax years, the most you can contribute to a Roth IRA is $5,500.

    If you are 50 or over, you may contribute a total of $6,500. If you have earned income, you can contribute to both a traditional IRA and a Roth IRA, but the combination of your contributions cannot exceed $5,500 ($6,500 if 50 or over).

    Roth IRA Contribution Deadline

    Each Roth IRA contribution relates to a specific calendar year.

    You can make a contribution from January 1 of that year until the filing deadline of your tax return. Those who wish to make a 2016 Roth IRA contribution can do so from January 1, 2016 until April 18, 2017. The deadline for Roth IRA contributions for the 2017 tax year is April 17, 2018. You don't have to make the entire $5,500 contribution at once; you can make many smaller contributions, as long as the total contributed does not exceed $5,500.

    No Tax Deduction for Roth IRA Contributions

    No tax deduction is available for a Roth IRA contribution. (Many individuals receive a tax deduction for their traditional IRA contributions, however.)

    Roth IRA Contributions are Eligible for the Retirement Savers Tax Credit

    While income tax deductions are not possible for Roth contributions, some taxpayers are eligible for the Retirement Savers Credit based on their adjusted gross income. This is an added incentive the tax code provides for low and middle-income taxpayers to increase their retirement savings and reduce taxes along the way. For more information on the income limitations for the Retirement Savers Credit for 2017 check out this link.

    Earn Tax-Free Growth from a Roth IRA

    The money you contribute to your Roth IRA grows tax-free.

    You do not have to pay any taxes on the earnings in the account. In fact, you do not even report the income to the IRS. Even in retirement, when you ideally first access your Roth IRA money, you do not owe taxes on the distribution. If you take your Roth IRA money prior to retirement, however, taxes may be due.

    Income Limitations and Roth IRAs

    Eligibility to contribute to a Roth IRA is restricted by your filing status and modified adjusted gross income. The Roth IRA income limitations change each year. For the 2017 tax year, single filers have the ability to contribute to a Roth IRA in 2017 that is phased out when modified adjusted gross income (MAGI) reaches the range of $118,000 - $133,000.

    If you are married filing jointly, your ability to contribute to a Roth IRA is phased out as your MAGI reaches the range of $186,000 to $196,000 in 2017. 

    No Required Distributions from Roth IRAs

    Unlike 401(k) plans and traditional IRAs, there is no age at which you must begin to distribute money from your Roth IRA. As a result, Roth IRAs are an excellent tool to pass along wealth to your children or grandchildren.