Roth IRA Rules You Most Likely Didn’t Know Inside Your IRA

Build your retirement account strategically by knowing the lesser-known Roth IRA rules.

In this article:

1. Shared Traditional and Roth IRA Contribution Limits
2. Eligibility Requirements
3. Traditional IRA Limitations That Do Not Apply to Roth IRA
4. Roth IRA Conversion
5. Roth IRA Withdrawal Rules

5 Lesser-Known Roth IRA Rules

1. Shared Traditional and Roth IRA Contribution Limits

One of the well-known Roth IRA rules concerns the contribution limits. The annual maximum IRA contribution for this year is $5,500. If you’re 50 years old and above, you can give up to $6,500. The additional $1,000 is your catch-up contribution.

Note, though, this contribution amount is already the maximum you can allot to all types of IRAs you own. If you want to make contributions to Traditional and Roth IRAs, you need to split the $5,500. The percentages of distributions are up to you. The most important thing is you don’t exceed the combined annual contribution limit.

Note: Since 2013, the Roth IRA limits have continued to increase in $500 increments each year to keep up with inflation.

2. Eligibility Requirements

Another of the important Roth IRA rules to remember is the income limit. For the tax year 2018, only those who have a modified adjusted gross income (MAGI) of less than $120,000 for single filers or $189,000 for those married filing jointly can contribute up to $5,500.

After you reach these Roth IRA income limits, your maximum contribution then begins to phase out. Married couples filing jointly who have an adjusted gross income of at least $199,000 and single filers with a MAGI of $135,000 or more can no longer contribute to a Roth IRA. If this is how much you earn, you can explore a back-door Roth IRA.

According to the IRS, earned income refers to all taxable income you receive from your employer or from the business or farm you run. It may also include certain disability payments you receive before you reach the minimum retirement age.

This means earned income includes wages, tips, and union strike benefits. The dividends, interest, and Social Security are not part of it. Retirement income, child support, and alimony are also not earned income.

3. Traditional IRA Limitations That Do Not Apply to Roth IRA

Traditional IRA rules state you can no longer make a contribution to your retirement account once you reach 70.5 years old. Around this time, too, you need to make your required minimum distributions.

These do not apply as Roth IRA rules. In Roth IRA, you can still make contributions regardless of your age as long as you have an earned income.

In fact, children can start saving for retirement. As long as they have an earned income, they can contribute to their retirement account. In this case, the parents create a custodial IRA. A custodian, who is usually the parent, manages the children’s assets. The child then takes over the account once they reach the age of majority. This can be either 18 or 21 years old. It varies by state.

The contribution limits are still $5,500 per tax year or up to their earned income, whichever is less. For example, if their wages for babysitting total $2,500, then that’s the maximum they can put into their Roth IRA.

Parents, on the other hand, can choose to match their children’s contribution. What is important is that much of what goes into their account is the child’s earned income.

The Roth IRA withdrawals rules also say you can delay distributions even until the death of the IRA owner. It’s also possible for you to contribute up to the maximum amount to your individual retirement account while you are also under an employer-sponsored retirement plan.

4. Roth IRA Conversion

Although there is an earned income cap for a Roth IRA, there is no income limit when converting Traditional IRA contributions to Roth. If you don’t qualify for the set income limit, you can still make a rollover contribution to your Traditional IRA and convert it to Roth later.

This process, however, can be tricky. Usually, you have to pay taxes on your contributions by adding the converted amount to your taxable income. It can then potentially raise your tax bracket.

5. Roth IRA Withdrawal Rules

One of the advantages of a Roth IRA is you can withdraw your contributions at any time without paying penalties for early distribution. This is why it’s a good savings account for children. They can grow their money and withdraw it when it’s time to go to college.

You can also withdraw the earnings from your Roth IRA tax-free and penalty-free once you reach 59.5 years old. You should also have owned the account for at least 5 years. You need to satisfy the five-year rule even if you’re already past 59.5 years old. Otherwise, you may still have to pay taxes on your earnings.

There is an early withdrawal penalty, however, if money is taken out of the retirement account. Early withdrawal is subject to inclusion in gross income plus a 10% additional tax penalty.

However, you may still make distributions even if you don’t meet the required minimum distributions in certain situations.

These include using the money, up to $10,000 lifetime maximum, to purchase your first home. You can also withdraw funds to pay for certain education expenses or unreimbursed medical expenses if you do not have any employment. It’s also possible to use the money to pay health insurance or withdraw once you have become disabled.

As you can see, there may still be many Roth IRA rules you are not familiar with. Knowing them can help you significantly in planning your retirement. You can decide whether it’s a better option than a Traditional IRA. You can also determine the best time to withdraw or how much to contribute. Take note that Roth IRA isn’t for everyone. For example, it may not be ideal for those who have a high income. If this is still something you wish to pursue, talk it over with an expert. A good financial or retirement planner can help you devise a smart strategy.

Do you know other Roth IRA rules we may have missed? Let us know in the comments section below!

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Editor’s Note: This post was originally published on January 23, 2018, and has been updated for quality and relevancy.