A Roth IRA is a type of individual retirement account where deposits into the account are not tax deductible and withdrawals are ID-10022456generally tax-free (with restrictions).

Basic Rules

  • You must have taxable compensation. Compensation is wages and self-employment income. Alimony also counts as compensation.
  • Your adjusted gross income for the year must be less than: $193,000 (in 2015) if your filing status is married filing jointly; $131,000  (in 2015) for single, head of household, or married filing separately (but only if you lived apart from your spouse all year); and $10,000 if your filing status is married filing separately and you lived with your spouse at any time during the year.

Contribution Limits

  • Under age 50: the most you can put into a Roth IRA is $5,500/year
  • Over age 50: the most you can put into a Roth IRA is $6,500/year
  • But you can’t put in more than your taxable compensation. For example, if your taxable compensation is $3,000, then your contribution limit would be $3,000, not $5,500.

Coordination with Traditional IRAs

Many people maintain both a traditional IRA and a Roth IRA. The interaction between the two is:

  • $5,500 (or $6,500, or your taxable compensation) is the total amount you can put into the two accounts. For example, you could put $3,000 into a traditional IRA and $2,500 into a Roth IRA, or any combination as long as it doesn’t exceed your contribution limit for the year.

Withdrawals

Withdrawals from a Roth IRA are 100% tax-free if:

  1. The account has been open for at least 5 years AND
  2. The withdrawal is made: after you turn age 59 1/2; or because you become disabled; or is made to a beneficiary; or is for the purchase of a first home

Withdrawals that don’t meet these requirements are taxed in the following way:

  1. Tax-free up to the amount of money you have deposited into the account through the years
  2. Any earnings on the account are taxable and may be subject to the 10% early withdrawal penalty

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