Five Roth rules

For Your Clients

Five Roth rules

A Roth IRA can be a powerful retirement tool.

Investors always have choices to make: pros and cons to weigh and deciding on retirement savings vehicles is no different. There are so many options, but a Roth IRA, if you qualify, can really help with retirement savings if you follow the rules.

1. Make Money, But Not Too Much

The IRS doesn’t allow individuals making more than $129,000 to contribute. Joint filers can earn up to $191,000 and still partially qualify. Keep in mind, though, that these are the maximums, and there are always exceptions. Investors should consult their advisor and a tax professional before moving forward.

2. Stay Within the Lines

If you qualify, you can sock away up to $5,500 if under 50 for 2015; $6,500 if over 50. You have until tax day 2016 (no extensions) to do so for 2015.

3. Make Smart Withdrawals

Roth IRA distributions are entirely tax-free, if you play by the rules. They can be complex, with different provisions covering your initial contribution and your earnings, but a knowledgeable financial or tax professional can walk through them. Although penalties apply to withdrawals made before age 59½ or within five years after a Roth is opened, they can be avoided in certain circumstances (e.g., disability, first-time home purchases or higher education).

4. Lengthen Your Roth's Life

Named beneficiaries can inherit your Roth IRA tax-free. Heirs are able to gradually withdraw the money, while the rest continues to grow tax-free throughout their lifetimes. That means choosing a younger beneficiary may be a smart move, as it lengthens the amount of time the money can remain in the inherited Roth.

5. Convert

Conversion means taxpayers at any income level can place tax-qualified assets (typically from a 401(k) or traditional IRA) into a Roth IRA. Investors will have to include the amount of previously deductible contributions to the converted IRA as taxable income, but since Roth IRA income is tax-free, it might be worth paying the tax now to save more later. This may make sense particularly for those in higher tax brackets, you’ll pay taxes after the conversion, but you’ll eventually receive a portion of your retirement income tax-free. A gradual conversion may also make sense for some. It’s a good idea to consult your financial advisor to see if a conversion would be in your favor. 

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.



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