Roth IRA

What is a Roth IRA?

A Roth IRA is a type of individual retirement account (IRA). Like all IRAs, a Roth IRA is an account that you have access to outside of the retirement plans that your employer offers. (The plans that employers offer are 401(k) or 403(b) accounts.)

You make post-tax (does not qualify for tax-deductible) contributions to a Roth IRA and your earnings from your investments are tax-free after you turn 59½. In other words, whatever you make in your Roth IRA, you don’t have to pay taxes when you make withdrawals (aka distributions) after you turn 59½. Any withdrawals before are subject to a 10% penalty tax. For example, if you take out $1,000 early, then you’ll be charged a $100 penalty.

Who qualifies for a Roth IRA?

Whether you may make contributions to a Roth IRA and how much you may contribute depends on a few factors: your filing status, your income, and your age.

You may not make contributions to a Roth IRA if you’re any of these:

• Your filing status is single, head of household, or married filing separately and did not live with your spouse at any time during the year AND your modified adjusted gross income (MAGI) is $139,000 or more in 2020.
• Your filing status is married filing jointly or qualifying widow(er) AND your MAGI is $206,000 or more.
• Your filing status is married filing separately and you lived with your spouse at any time during the year AND your income is $10,000 or more.

You may contribute up to $6,000 (or $7,000 if you’re 50 years old or older) if you’re any of these:

• Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time during the year AND your MAGI is less than $124,000.
• Your filing status is married filing jointly or qualifying widow(er) AND your MAGI is less than $196,000.

Note that the $6,000 is the total contribution limit for all of your traditional and Roth IRAs. Also, if your income is less than $6,000, then you may only contribute up to your total taxable income. For example, if your taxable income was $5,000, you may only contribute up to $5,000.

You may contribute a reduced amount (refer to this IRS article to determine what your contribution limit is), if you’re any of these:

• Your filing status is single, head of household, or married filing separately and did not live with your spouse at any time during the year AND your MAGI is $124,000 or more and less than $139,000.
• Your filing status is married filing jointly or qualifying widow(er) AND your MAGI is $196,000 or more but less than $206,000.
• Your filing status is married filing separately and you lived with your spouse at any time during the year AND your income is less than $10,000.

Below is a table breakdown. Do consult a tax advisor if you have questions.

Roth IRA income and contribution limits for 2020

Single, head of household, or married filing separately and you did not live with your spouse at any time during the year
Modified AGI	Contribution Amount
< $124,000	$6,000 ($7,000 if you’re 50 or older)
≥ $124,000 but <$139,000	a reduced amount
≥ $139,000	$0

Married filing jointly or qualifying widow(er)
Modified AGI	Contribution Amount
< $196,000	$6,000 each ($7,000 each if you’re 50 or older)
≥ $196,000 but < $206,000	a reduced amount
≥ $206,000	$0

Married filing separately and you lived with your spouse at any time during the year
Modified AGI	Contribution Amount
< $10,000	a reduced amount
≥ $10,000	$0

Roth IRA vs Traditional IRA

Roth IRAs are commonly compared to traditional IRAs. Here are the main characteristics where they differ:

• Income limit for contributions: there are no income limits for whether you may contribute to a traditional IRA, but there are income limits for contributions to Roth IRAs. See details above.
• Mandatory distribution: traditional IRAs have mandatory minimum distribution requirements whereas Roth IRAs do not. You are required to withdraw a minimum amount from your traditional IRA each year starting at age 72 (70½ if you turned 70½ before January 1, 2020). Otherwise, you’ll be charged a 50% penalty tax on the minimum distribution amount. If you need to determine your minimum distribution amount, refer to the IRS website or consult with a tax advisor.
• Taxes: traditional IRA contributions are pre-tax whereas Roth IRA contributions are post-tax. In other words, traditional IRA contributions are tax deductible, but Roth IRA contributions are not. On the flip side, earnings from traditional IRAs are taxable whereas earnings from Roth IRAs are not.

Choosing a Roth IRA provider

Ready to open a Roth IRA? We’ve reviewed a number of Roth IRA providers. Scroll to the top to see the reviews.