Like a Traditional IRA, the Roth IRA offers investors a way to set aside up to $5,500 annually for retirement. Unlike a traditional IRA, contributions to a Roth IRA are never tax deductible. However, a Roth IRA provides a unique advantage: The potential for tax-free income in retirement.
Roth IRA at a glance
- Nondeductible, after-tax contributions
- Tax-free earnings growth and tax-free distributions at retirement
- Maximum annual contribution of $5,500 ($6,500 if age 50 or older), or up to 100% of earned income, whichever is less
- Distributions not required at age 70½
- No age limits on contributions
Are you eligible?
If you have earned income below $116,000 (single filers) or $183,000 (married, filing jointly) for 2015, you may contribute up to $5,500 (or 100% of your earned income, whichever is less) a year to a Roth IRA, regardless of your age and whether or not you are an active participant in an employer-sponsored retirement plan. You may also contribute to a Roth IRA for your non-earning spouse if you file a joint return and you and your spouse meet certain compensation and income limits.
Are your contributions deductible?
Contributions to a Roth IRA are not deductible and must be made with after-tax dollars.
How long can you contribute?
You may contribute to your Roth IRA for as long as you want, provided you have earned income below $116,000 (single filers) or $183,000 (married, filing jointly).
What about withdrawals?
Since Roth IRA contributions are made with after-tax dollars, you may withdraw your contributions at any time tax and penalty-free. You may withdraw your investment earnings tax-free if you have held the account for at least five taxable years, beginning with the first taxable year for which you made a contribution and:
- You are at least age 59½; or
- You become disabled or pass away; or
- You use the money for a first-time home purchase (subject to a lifetime maximum of $10,000)
All other withdrawals will be subject to federal income tax and a possible 10% early withdrawal penalty.