Roth IRA Contributions Rules: A Comprehensive Guide

Roth IRA contributions is an individual retirement account that allows for qualified withdrawals on a tax-free basis, as long as the conditions are satisfied. The Roth came on board in 1997, named after William Roth, a former Delaware Senator. Also, Roth IRA rules state that as long as you have owned your account for 5 years and are up to age 59 ½ or older, you can withdraw your money when you want to without owing any federal taxes.

Roth IRA Contribution Rules: A Comprehensive Guide

Be it as it may most people don’t understand the full extent of what a great investment vehicle the Roth IRA is, and many also do not know how best to use it. Thus if you are contemplating opening a Roth IRA, or you already have one in place, there are certain rules about it you have to know, to make the account work for you.

Let’s take a look at these rules:

What’s Your Contribution Limit Into Roth IRA?

As of 2020, the maximum contribution to a Roth IRA is $6,000 per year. However, if you are 50 or older, it increases it, to $7,000 per year.

Now this applies to people who have earned income, from salaries, wages, commissions, bonuses, self-employment, freelance, and contract work.

For the $6,000/$7,000 contributions, there’s also another limit. This is the most you can contribute to one or a combination of IRA accounts. This includes both Roth IRAs and traditional IRAs.

Setting Up Roth Accounts for Your Spouse and Kids

Do you know that you can have a Roth IRA account for anyone and everyone in your family, who has earned income?.

Additionally, there’s an exception for your spouse. Here it is, under a spousal IRA, you can make a contribution of up to $6,000 (or $7,000 if 50 or older) even if your spouse has no earned income. Now, under this special type of IRA, you can make a contribution to Roth or traditional IRA accounts for both you and your spouse, in as much as you have sufficient earned income that can support both contributions.

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To be eligible for a spousal IRA, your partner must be your spouse, not a girlfriend, boyfriend, or fiancé.

Furthermore, if any of your children have earned income, you can open a custodial Roth for that child. Now, the contributions will be eligible if your child has a part-time job, or earns money from activities like babysitting, lawn cutting, freelance writing, etc.

The disadvantage however is that the income received must be reported to the IRS, for it to qualify for contributions. Contributions depend on income declared on your income tax return.

Phased Out

An income ceiling has been set by the IRS on your ability to contribute to a Roth IRA. If you happen to earn in excess of that ceiling, you won’t be able to contribute to a Roth IRA. This is unlike the Traditional IRAs, where the contribution is no longer tax-deductible if you are covered by an employer-sponsored retirement plan and your income exceeds a certain level. When this happens, you can still make a contribution to a traditional IRA, but it won’t be tax-deductible.

The current income limits beyond which you can no longer make a Roth contribution are thus:

Single, full contribution up to $124,000, partial contribution up to $139,000, after which, the contribution is no longer allowed.

Married filing jointly, full contribution of two $196,000, partial contribution up to $206,000, after which no contribution is allowed.

Roth IRA Contributions

The contributions to a Roth IRA are not tax-deductible. Thus, they can be withdrawn at any time free from both ordinary incomes. Tax and the 10% early withdrawal penalty that is typically applied when you withdraw funds from a retirement account before you turn 59 ½.

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Understand that, the income you earn from investments on your Roth account. Is treated like withdrawals from any other retirement plan. Thus, if any of that money is withdrawn before you turn 59 1/2. You’ll be subject to both ordinary income tax and the penalty.

However, under IRS ordering rules, you are granted access to withdraw your contributions from a Roth IRA before your accumulated investment earnings. You at liberty to access your contributions at any time.

Be it as it may, you have to understand that, when it comes to early withdrawals, if the value of your Roth IRA falls below your total contributions, you will be limited to withdrawing the net value of the account, and not the number of your original contributions.

Investing in a Roth IRA

Since the Roth IRA is a retirement account, you need to invest has the long-term in mind. Now, you have decades to invest. So you’ll need to add a high risk/high reward investments to the mix. This includes stocks, mutual funds, exchange-traded funds, real estate investment trusts, as well as similar investment vehicles. You can achieve this, by moving your plan to the right investment account.

You’ll be needing investments that are geared towards generating long-term growth.

Roth IRA is one of the greatest investment modules you can ever use in making investments. If you are still contemplating whether to invest in it or not, I’ll advise you to go for it.

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