Roth individual retirement accounts (IRAs)allow taxpayers meeting income eligibility limits to save money tax-free for either retirement or estate-planning purposes. Unlike a traditional IRA, contributions to Roth IRA accounts are not tax-deductible. The Internal Revenue Service's (IRS's) Roth IRA policy differs from traditional IRAs in other significant ways, as traditional IRA contributions are made with pretax money while Roth IRAs are funded with after-tax dollars.
Annual Contribution Limits
As with traditional IRAs, eligible Roth IRA account owners may contribute a maximum of $5,000 annually if under the age of 50, and an additional catch-up amount of $1,000 if aged 50 or older, for a total of $6,000. Distributions may be made tax-free once the account owner turns 59 1/2, as long as the account was established at least five years previously. Unlike traditional IRAs, there is no mandatory age for required minimum distributions.
Roth IRA Income Limitations
No matter how high the adjusted gross income (AGI), anyone may make annual contributions to a traditional IRA, even if the investments are not tax-deductible. This is not true of Roth IRA policy. At the time of publication, the AGI limit for taxpayers filing singly is $107,000 or under to make a full contribution, and between $107,000 and $122,000 to make a partial contribution. Above those limits, no contribution is allowed. For married couples filing jointly, the AGI limit for a full contribution is $169,000 or under, with partial contributions permitted between 169,000 and less than $179,000. Over that amount, no contribution is permitted.
No Age Limits
While those contributing to a traditional IRA must take minimum distributions by the age of 70 1/2 and cannot contribute to a traditional IRA past that age even if earning income, there are no such limits for Roth IRA contributors. If earning income and meeting the AGI, a Roth IRA account holder may continue to contribute as long as he wants. Because distributions are not required, Roth IRA accounts may be used to pass assets on to heirs and beneficiaries tax-free. Designating a specific beneficiary means the account does not go through the probate process.
Early Withdrawal Penalties
If taking distributions before the minimum age or if the account is less than five years old, the Internal Revenue Services will levy a 10 percent tax on amount you withdrew. The IRS allows certain exceptions to this rule, and allows up to $10,000 to be withdrawn without penalty for first-time home buyer expenses. For married couples, this exemption applies only if it is the first home purchase for both individuals.
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