The Roth IRA as a way for individuals to contribute after-tax dollars to a retirement account where they can grow tax free—and potentially be distributed tax free as well. Anyone can contribute to a Roth IRA as long as they (or their spouse, if filing a joint return) receive taxable compensation during the year, which makes the Roth IRA a good investment option for any wage earner. To be eligible to contribute, your modified adjusted gross income (MAGI) must meet certain requirements. Earnings grow tax free, but contributions are not tax deductible. Unlike traditional/rollover IRAs and other qualified plans, you are never required to take a distribution from a Roth IRA.
Features Individuals who have earned income for the 2023 tax year may contribute to their own account or to an account for their nonworking spouse, subject to MAGI thresholds: • Single filers: Single filers can contribute to a Roth IRA if their MAGI is less than $138,000 and can make a partial contribution if their MAGI is between $138,000 and $153,000. Individuals with a MAGI of more than $153,000 are not eligible to contribute. • Married filing jointly: Individuals can make a full contribution to a Roth IRA if their MAGI is less than $218,000. If your MAGI is between $218,000 and $228,000, you can make a partial contribution. A MAGI of more than $228,000 makes you ineligible to contribute. • Married filing separately: If you are married filing separate returns and you lived apart from your spouse at all times during the taxable year, you are treated as a single taxpayer for purposes of the Roth IRA. You can make a partial contribution if your MAGI is less than $10,000. A MAGI of more than $10,000 makes you ineligible to contribute. A step-by-step worksheet is available in IRS Publication 590 to help you calculate the exact amount of your allowable Roth IRA contribution.
For 2023, individuals can contribute up to $6,500 or 100 percent of earned income. Account holders age 50 and older can contribute up to $7,500 or 100 percent of earned income.
Deadline to Establish and Contribute
You must set up and fund your account by your tax filing deadline, not including extensions.
Account holders can withdraw contributions at any time, penalty and tax free.
Distributions of earnings and conversion assets are penalty and tax free if they have been in the account for five years and the account holder meets one of the following requirements: age 591/2, death, permanent disability, or first-time home purchase ($10,000 lifetime limit). Generally speaking, if you withdraw these assets before you meet one of these requirements, you’ll have to pay a tax bill and a 10 percent penalty as well.
If you don’t meet the five-year requirement, and you use the money to pay for medical expenses above 10 percent of adjusted gross income, for education, or for a first-time home purchase, you’ll have to pay taxes on the withdrawal, but you won’t have to pay the penalty.
Tax Treatment of Distributions
Distributions are tax free if they meet one of the requirements outlined here.
Contributions are always 100 percent vested.
You cannot take a loan from a Roth IRA.
No annual administration is required other than the custodian’s reporting of contributions to and distributions from the account. Individuals are responsible for reporting this information correctly when they file their taxes.
Who Can Benefit from the Roth IRA?
People who expect to be in the same or a higher federal income tax bracket at retirement will benefit from the Roth IRA’s tax-free distributions (as long as they meet the conditions outlined here). In addition to their tax-favored distributions, Roth IRAs serve as a flexible supplement to workplace retirement plans.
Commonwealth Financial Network® does not provide tax or legal advice. Please contact your tax or legal professional regarding your individual situation.