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What to Know About Roth IRAs

What to Know About Roth IRAs

The most common types of IRAs—traditional, Roth, SEP, and SIMPLE—provide various kinds of benefits, but the Roth IRA is probably the favored among financial professionals.

Unlike other IRA accounts, the Roth IRA is tax-free, meaning contributions grow tax-free and distributions are withdrawn tax-free. However, any IRA can be beneficial if you don’t have access to a 401(k) or have maxed out your employer’s retirement plan. It’s important to understand the differences between the different types of IRAs and speak with a CFP® who can advise an appropriate retirement account for your specific situation.

Established as part of the Taxpayer Relief Act of 1997, the Roth IRA gets its name from Former Representative and Senator William V. Roth of Delaware. The late Mr. Roth was a big advocate for IRA reform and tax cuts, even co-sponsoring a plan for a steep tax cut, which was included in a 1981 tax bill signed into law by President Ronald Reagan. Roth IRA accounts have been available since 1998, arising out of a need for changes to the traditional IRA. Since that time, countless Americans have benefitted from contributing to these specialized IRAs.

Tax Advantages

Each type of IRA has tax advantages, but Roth IRAs can be completely tax-free. Traditional, SEP, and SIMPLE IRAs are tax-deferred; you’ll pay taxes at withdrawal, rather than before contributing. Roth IRA contributions have already been taxed, so the money is able to grow without Uncle Sam taking his cut.

Contribution Limits

Only earned, taxable income can be contributed to a Roth IRA. Even though an IRA is funded individually and not taken from your paycheck, you cannot contribute more than $5,500 or your annual taxable compensation (2016). If you have both a traditional IRA and a Roth IRA, total contributions to both accounts cannot exceed this limit.

The IRS has also placed income limits on Roth IRAs. For the 2016 tax year, the changes are very minimal. Though traditional and Roth IRAs have the same contribution limits, Roths have phase-out rules for individuals and couples, so once you reach a certain income level, the amount you’re able to contribute decreases. For single filers, the phase-out starts at $117,000 annual income, and you’ll become ineligible to contribute to a Roth IRA when your annual taxable income hits $132,000. For married filers, the phase-out starts at $184,000 combined, and you’ll become ineligible when you and your spouse together make $194,000 annually.

No Minimum Age Requirement

Like traditional IRAs, there is no minimum age requirement to open and fund Roth IRAs, so it’s a good idea to start early. Helping your child set up a Roth IRA with money earned through a part-time or summer job can be a great way to teach about personal finance.

Higher Contribution Limit for Ages 50+

Roth IRAs have contribution limits1, and you’ll be penalized for putting in more than $5,500—the maximum allowable amount for 2016. However, if you’re at least 50 years old, you can contribute a higher annual amount than younger people. This limit is $6,500 for the 2016 tax year.

If you’re at least 50 years old, you can contribute more to your Roth IRA.

Spousal Contributions

Similar to traditional IRAs, a Roth IRA can be set up for—and receive contributions for—a non-working spouse. However, the contributor’s taxable income cannot be less than the total contribution amount for both people. For example, a working wife under the age of 50 can contribute $5,500 for herself along with an additional $5,500 for her non-working husband, as long as she earns at least $11,000 annually. This is a helpful rule for many couples with one stay-at-home parent. The limit increases to $6,500 per spouse if both people are over the age of 50.

Contribution Deadline

Although many tax deadlines are at the end of a calendar year, Roth IRAs—and other IRAs—are different. You have until Tax Day—April 15 of the following year in most cases—to contribute to your Roth IRA.

Although Tax Day usually falls on April 15, there are some conditions: the deadline can’t fall on a weekend, and it cannot fall on a legal holiday. This year, the deadline for most people to file 2015 income taxes was April 18, 2016. Even though it was a Friday, April 15 happened to fall on Emancipation Day—a holiday observed in Washington D.C.—so the income tax deadline was pushed to the following Monday, April 18.

Early Withdrawals of Roth IRAs

There are several restrictions placed on traditional IRA withdrawals, but Roth IRAs offer a little more wiggle room. You can’t typically access your traditional IRA money before age 59½ without a 10% penalty, but with a Roth IRA, you can withdraw as much as the exact amount of your contributions without penalty. If you’re older than 59½ and your Roth IRA has been open for at least 5 years, you can withdraw as much as you’d like.

There are several exceptions to the rules established for IRAs, including withdrawals for first home purchases and college expenses. These exceptions are explained in greater detail in the IRS’s Publication 590-B.

Required Minimum Distributions

Unlike traditional, SEP, and SIMPLE IRAs, Roths do not require withdrawals until after the death of the owner of the account. Other IRAs have required minimum distributions (RMDs) at age 70½.

There are many benefits to a Roth IRAs, but you have to know the rules. This article is not an exhaustive list of IRA rules, but a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional can help you navigate the ins and outs of retirement planning. Call 615-861-6101 today to speak with Deering Wealth Team.


  1. If your annual compensation was less than the dollar limit, your Roth IRA contribution cannot exceed your taxable compensation for the year. The IRA contribution limit does not apply to rollover contributions or qualified reservist repayments. Your Roth IRA contribution could be limited due to your income and filing status. Please visit IRS.gov for more details.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk, and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Any opinions are those of Mark Deering and not necessarily those of Raymond James. RMDs are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Like traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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Mark Deering
mark.deering@raymondjames.com

Mark Deering, CFP® is a CERTIFIED FINANCIAL PLANNER™ and the Executive Vice President of Southwestern Investment Group. Mark started his career in the '90s selling books through Southwestern Advantage while earning degrees in business, economics, and Biblical studies at Wheaton College. Upon graduation, he was invited to join Southwestern Investment Group and started to take on more responsibility. Mark mentors younger advisors regularly and is occasionally asked to speak at industry conferences. When he's not working, Mark loves spending time with his wife, Rachel, and their three kids.



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