All the Roth IRA Rules You Need To Know

Roth Rules on Eligibility, Contributions, Taxes, Conversions, and More

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Saving for retirement is one of the most important things you can do to prepare for the future. Roth IRAs are one popular tool for retirement savings due to their potential to provide tax-free income in your later years.

However, the rules surrounding Roth IRAs can be complicated, and knowing when to use one is difficult. We’ll break down everything you need to know.

Key Takeaways

  • Contributions are taxed when the money is put in, unlike upon withdrawal as with a traditional IRA.
  • Contributions are currently limited to $6,000 per year for most people.
  • You can withdraw money, including earnings, tax-free during retirement.
  • You can typically begin withdrawals starting when you turn 59 ½.

Who Is Eligible for a Roth IRA?

One of the advantages of a Roth IRA is that it’s very easy to be eligible for one. Unlike 401(k)s, where you have to work for an employer that offers the account as a benefit, anyone can open a Roth IRA, as long as they have earned income for the year.

You can’t contribute to a Roth IRA if you do not have any earned income for the year or it  exceeds an upper limit. Some people have unearned income, which is income derived from things such as interest, dividends, capital gains, unemployment, Social Security, and pension benefits. You can’t use these sources of income to contribute to a Roth IRA.

Roth IRA Income Limits

There are income restrictions on who can contribute to a Roth IRA. While you need to have earned income to make contributions, your contribution limit can be affected by the amount of money you earn. As you earn more, your contribution limit decreases until you are no longer allowed to add money to the account.

Note

People with low incomes can earn a tax credit, called the Saver’s Credit, for contributing to a Roth IRA, making it even more beneficial to save.

The amount you can earn before your contributions are limited depends on your tax filing status.

Filing Status Full Contribution Partial Contribution No Contributions Permitted
Single or head of household Less than $129,000 $129,000 - $144,000 $144,000 or greater
Married, filing jointly Less than $204,000 $204,000 - $214,000 $214,000 or greater
Married, filing separately Less than $10,000 N/A $10,000 or greater

The incomes listed in the table above are based on your modified adjusted gross income (MAGI), which is your gross income, adjusted for things like educator expenses, alimony payments, and student loan interest.

Roth IRA Contribution Limits

Each year, there is a limit on the amount you can contribute to your Roth IRA. For 2022, the limit is the lesser of $6,000 or your earned income. If you’re at least 50 years old, you can contribute an additional $1,000 each year, bringing your maximum contribution to $7,000.

Note

The contribution limit applies across all of your IRAs. You can’t contribute $6,000 to a Roth IRA and $6,000 to a traditional IRA. However, you could contribute $3,000 to each.

If your MAGI is above certain thresholds, your ability to contribute is restricted. For example, a single person earning $129,000 or more can only contribute less than the $6,000 maximum. The more they earn, the less they can contribute, until their contribution limit reaches $0 if their MAGI reaches $144,000.

If your income exceeds the limit for a full contribution, you can determine the amount you can contribute using the following process:

  1. Take your MAGI and subtract $204,000 if you’re married, $129,000 if you’re single.
  2. Divide the result by $15,000 if single, $10,000 if you’re married.
  3. Multiply the result by the maximum contribution for that year ($6,000 for 2022).
  4. Subtract that result from the maximum contribution for that year ($6,000 for 2022).

So, if you are a single person and have an MAGI of $135,000, the math looks like this:

$135,000 - $129,000 = $6,000

$6,000 / $15,000 = 0.40

0.40 * $6,000 = $2,400

$6,000 - $2,400 = $3,600

You can contribute a maximum of $3,600.

Penalties for Excess Contributions

If you contribute more than you are permitted, you’ll have to deal with penalties. Excess IRA contributions are taxed at 6% per year for each year in which they remain in the IRA. To avoid this penalty, you have to withdraw the excess contributions and any of their earnings from the account.

There are some complex tax strategies, often called the “backdoor Roth,” that let you get around income limits and avoid these penalties. However, these can be difficult to implement.

Roth IRA Withdrawal Rules

The withdrawal rules for Roth IRAs differ slightly from the rules for traditional retirement accounts.

Like traditional retirement accounts, withdrawals are limited until you turn 59 ½. Once you reach that age, you can make withdrawals with no restrictions, as long as the account has been open for at least five years.

Before you turn 59 ½, you can withdraw contributions, but not earnings, from a Roth IRA tax-free and penalty-free. You can also withdraw money without paying a penalty if you are using it for:

  • A first-time home purchase
  • Qualified education expenses
  • Qualified birth or adoption expenses
  • You become disabled
  • You use it for unreimbursed medical expenses or health insurance (if you’re unemployed)

You will pay taxes on these withdrawals unless the account has been open for five years or more.

Under the CARES Act, those affected by the coronavirus pandemic, such as those who contracted COVID-19 or lost their jobs, can withdraw up to $100,000 from the account penalty-free, and have three years to pay any related taxes or return the money to the account.

If you make withdrawals for other reasons before you turn 59 ½, you have to pay taxes on any earnings you withdraw and will pay a 10% penalty on top of that.

Roth IRAs Have No RMD Rules

Some retirement accounts have required minimum distributions (RMDs) once you reach a certain age.

RMDs require you take a certain percentage of your account balance out of the account each year, which can affect your taxes, especially with traditional retirement accounts. Roth IRAs have no RMDs while the account holder is alive, so you can keep your money in the account, growing tax-free, for as long as you’d like.

Roth IRA Conversion Rules

If you have a traditional IRA, you can convert some or all of the money in it to a Roth IRA. Your brokerage should be able to help you complete this conversion.

Put simply, you tell your broker to convert the balance to a Roth IRA, then you pay income taxes on the amount converted because you didn’t pay that tax when putting it in a traditional IRA. This lets your money grow tax-free and helps you avoid RMDs.

One benefit of Roth IRA conversions is that there is no income limit on these conversions. If your income is too high to contribute to a Roth IRA, you can instead contribute to a traditional IRA and convert the balance to a Roth IRA.

Note

If you make a traditional IRA contribution and decide later that year that you’d rather have made a Roth IRA contribution, you can work with your broker to recharacterize your contribution to be a Roth one. This lets you avoid paying income tax on the earnings. You must meet the Roth IRA eligibility and income requirements to do this.

The Bottom Line

Roth IRAs are a powerful tool for retirement saving. Unlike traditional retirement accounts, with a Roth IRA, you pay taxes on the money you contribute and receive tax-free withdrawals in retirement. This makes them a good choice for people in low tax brackets because their savings can grow tax-free.

Frequently Asked Questions (FAQs)

Do I have to report Roth IRA contributions on my tax return?

No. Roth IRA contributions are not reported on your tax return because they are not deductible. However, you may be eligible for the Saver’s Credit based on your contributions.

How do you open a Roth IRA?

You can open a Roth IRA by working with your brokerage firm. It can help you open the account, deposit funds, and purchase investments.

What is a backdoor IRA?

A backdoor Roth IRA is a strategy for avoiding income limits on Roth IRA contributions. If you make too much money to contribute directly to a Roth IRA, you can instead contribute to a traditional IRA, then convert that balance to a Roth IRA.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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  2. IRS. “Unearned Income.”

  3. Merrill. “Can I Contribute to a Roth IRA If I'm Retired?

  4. IRS. “Retirement Savings Contributions Credit (Saver’s Credit).”

  5. IRS. “Amount of Roth IRA Contributions That You Can Make for 2022.”

  6. IRS. “Definition of Adjusted Gross Income.”

  7. IRS. “Retirement Topics - IRA Contribution Limits.”

  8. IRS. “Publication 590-A.”

  9. Charles Schwab. “Roth IRA Withdrawal Rules.”

  10. IRS. “Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers.”

  11. IRS. “IRA FAQs - Distributions (Withdrawals).”

  12. Vanguard. “IRA Roth Conversion.”

  13. IRS. “IRA FAQs.”

  14. IRS. “Topic No. 451 Individual Retirement Arrangements (IRAs).”

  15. Morningstar. “Is the Backdoor Roth Still Legit?

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