Tax Breaks for Money in Roth IRA

by Jane Meggitt

Tax breaks for money held in a Roth Individual Retirement Account differ from those of the traditional IRA. For Roth IRA account owners, the tax breaks come during the retirement years, when withdrawals are tax-free. Unlike the traditional IRA, contributions to the Roth IRA are not tax-deductible, but depending on your financial situation, a Roth IRA has other advantages.

Roth IRAs

Contributions to traditional IRAs are made with pre-tax money, and earnings on the funds are tax-deferred until the account owner begins taking distributions after retirement. Presumably, the account owner will be in a lower tax bracket at that time. Contributions to Roth IRAs are made with post-tax dollars, and no tax is levied on withdrawn earnings as long as the account owner is at least 59 1/2 years old and has held the account a minimum of five years.

No Mandatory Withdrawals

Unlike traditional IRAs, which require distributions by the time the account owner turns 70 1/2, money from Roth IRAs never has to be withdrawn. In addition, as long as the account owner earns income and falls within the adjusted gross income (AGI) eligibility limits, he can continue to make contributions to a Roth IRA past the age of 70 1/2, a privilege not granted traditional IRA owners. Because withdrawals are not mandatory, Roth IRA accounts may be used as estate-planning tools to leave assets to heirs tax-free.

Annual Contributions

At the time of publication, the annual contribution limit for both Roth and traditional IRAs is $5,000 for individuals under the age of 50 and $6,000 for those aged 50 and older. Contributors must earn at least that much in income in order to qualify. Unlike traditional IRAs, which have no income limit requirements even if those earning above a certain amount cannot deduct contributions, Roth IRA contributors must meet the annual adjusted gross income limits established by the IRS.

Adjusted Gross Income Limits

As of the time of publication, the AGI limit for taxpayers filing singly is under $107,000 to make a full Roth IRA contribution, and between $107,000 and $122,000 to make a partial contribution. For married couples filing a joint tax return, the AGI is less than $169,000 for making full contributions, and between $169,000 and under than $179,000 to qualify for partial contributions.