Roth IRA Q&A

Roth IRAs are a popular investment for retirement savings. They are available to workers with earned income (i.e., salary, bonuses, or self-employment) under phaseout limits that are adjusted annually for inflation.

Below are answers to nine commonly asked questions about Roth IRAs:

 

 What is a Roth IRA?  A Roth IRA is a personal retirement account that lets people benefit from tax-free interest growth, providing they meet certain conditions. Contributions (deposits) are made with after-tax income (i.e., money that has already been taxed). A Roth IRA is not an investment  “product” per se but a special account that people put investment products into. Examples include mutual funds, bonds, individual stocks, certificates of deposit, and other investments that are available through financial institutions.

 

 Why is it Called a Roth IRA?  Roth IRAs were named after U.S. Senator William Roth (from Delaware) who spearheaded the effort to create them. They became a retirement savings option starting in 1998.

 

 How Does a Roth IRA Differ from a Traditional IRA? Traditional IRAs are made with before-tax dollars (i.e., money that has not been taxed) and withdrawals are taxed as ordinary income. Required minimum distributions (RMDs) must begin starting at age 72. Earnings in a Roth IRA can be withdrawn tax-free once an investor reaches age 59 ½ and an account has been in place for at least five years. Taxpayers who want to hedge IRA tax benefits may decide to split their annual deposit between Traditional and Roth accounts.

 

 What is the Maximum That People Can Contribute? In 2022, workers can contribute up to $6,000 (or the amount of earned income, whichever is less). Workers age 50+ can contribute an additional $1,000 as a “catch-up” contribution, for a total maximum deposit of $7,000. Deposits can be made in a single lump sum or in smaller increments throughout the year.

 

 What is the Minimum That People Can Contribute? Workers can make deposits up to the annual maximum limit. The minimum deposit amount is typically determined by plan custodians (e.g., a bank or mutual fund). There is nothing wrong with contributing only $500 or $1,000 to a Roth IRA if that is all that someone can afford.  Any savings is always better than no savings.

 

 What is the Deadline to Make a Roth IRA Deposit? Roth IRA deposits can be made as early as the first business day of each year. Conversely, taxpayers have until the tax filing deadline (on or about April 15^th of the following year) to contribute. For example, April 2023 is the deadline to contribute to 2022 Roth IRAs.

 

 Are There Income Restrictions on Roth IRAs? Yes – income for single taxpayers must be less than $129,000 (MAGI – modified adjusted gross income) to deposit the full $6,000 (or $7,000) maximum amount. Income above that results in reduced contributions until it exceeds $144,000 MAGI. At that point, someone is no longer eligible to contribute. The phase-out range for Roth IRAs for married couples filing jointly is up to $204,000 (for a full contribution) to $214,000 (above which, no Roth IRA contribution is allowed).

 Where Can People Go to Start a Roth IRA? Taxpayers can contact just about any financial institution (e.g., banks, brokerage firms, mutual funds, and insurance companies) to select investments for a Roth IRA.  Many investors choose no-load mutual funds that offer a variety of options with low fees. Most mutual fund companies require a minimum investment to start a Roth IRA, typically between $500 and $2,500. Some companies allow an investor to start an IRA account with less money than is required for a non-IRA account.

 Where Can People Learn More About Roth IRAs? Cooperative Extension’s Investing for Your Future home study course is a useful resource. Unit 7, “Tax-Deferred Investments,” includes information about Roth IRAs and Units 4-6 discuss various investment products that can be used to fund a Roth IRA. Other useful resources are the Roth IRA Calculator from Bankrate and Roth IRA Basics from Investopedia.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.