What is a Roth IRA?
Key facts
- You must fulfill certain income requirements to qualify for a Roth IRA.
- Contributions towards Roth IRA accounts are taxed upfront, with annual contributions capped at $6,000 for those under the age of 50 and $7,000 for those 50 and older.
- Contributions can be withdrawn anytime without taxes or penalties, and qualified distribution of earnings are tax-free.
Saving for retirement is a hot topic, but understanding the savings plans available can be overwhelming. While most people are familiar with the features of Traditional IRAs and 401(k)s, the Roth IRA is a bit lesser known. This guide provides a brief overview of the Roth IRA so you can determine whether it fits your needs.
What is a Roth IRA?
The most important thing to know about the Roth IRA is that, unlike Traditional plans, your contributions are taxed up-front. This has an important benefit. In an emergency, you can withdraw your contributions to cover unexpected expenses without taxes or penalties. Funds in your Roth IRA grow tax-free, and when you take qualified distributions, you are not responsible for any additional taxes.
There are immediate benefits to making Roth IRA contributions as well. For example, your contribution might qualify for the Retirement Savings Contributions Credit (Saver’s Credit), which reduces tax liability for low- and moderate-income workers.
You can continue to contribute to your Roth IRA indefinitely, and there is currently no age at which you must take mandatory distributions. As a result, your savings can continue to grow indefinitely.
How Does a Roth IRA Work?
There is a limit to the amount that you can contribute to your Roth IRA, which is reviewed by the IRS each year. In 2020, eligible individuals under the age of 50 can contribute up to $6,000 to their accounts. Those 50 and older can contribute an additional $1,000, for a total of $7,000.
Your ability to contribute to a Roth IRA is subject to certain income requirements, which are revised and updated annually as well. This table breaks down the impact of income on Roth IRA contributions:
| Your filing status is… | And your modified AGI is… | Then you can contribute… |
| Married filing jointly or qualifying widow | < $196,000 | up to the limit |
| > $196,000 but < $206,000 | a reduced amount | |
| > $206,000 | zero | |
| Married filing separately | < $10,000 | a reduced amount |
| > $10,000 | zero | |
| Single, head of household, or married filing separately | < $124,000 | up to the limit |
| > $124,000 but < $139,000 | a reduced amount | |
| > $139,000 | zero |
Source: IRS website
Disclosure
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.