Roth IRA

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Template:IRA Sidebar Template:Back to Bogleheads Retirement Planning Start-Up Kit An individual retirement arrangement, or IRA, is a personal savings plan which allows you to set aside money for retirement, while offering you tax advantages. You may be able to deduct some or all of your contributions to your IRA (Traditional IRA) and pay taxes when you withdraw from the IRA; or receive no tax deduction on your contributions (Roth IRA), with, subject to certain restrictions, no tax imposed on your distributions. Amounts in your IRA, including earnings, generally are not taxed until distributed to you. IRA's cannot be owned jointly. However, any amounts remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.[See also Traditional IRA.]

Types of IRAs

There are two basic types of IRA's, traditional and Roth. A review of the differences between the two account structures follows:

Traditional IRA

  • Contributions are tax-deductible (depending on income level).
  • Penalty free withdrawals can begin at age 59 1/2 and are mandatory by 70 1/2. [1]
  • Taxes are paid on earnings when withdrawn from the IRA.
  • Available to everyone with earned income (although tax-deductibility depends on income level). [2]
  • Withdrawals before age 59 1/2 are subject to a 10% penalty (subject to exceptions).

Roth IRA

  • Contributions are not tax-deductible.
  • There is no mandatory distribution age for the account owner, or in the case of a spousal rollover.
  • All earnings and principal are tax free (subject to some minimal conditions).
  • Contributions may be made only by those having earned income and making under a certain income; anyone can convert a Traditional IRA to a Roth.
  • Principal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions).

Contribution Eligibility and Limits

Your ability to contribute to a Roth IRA is limited depending on your filing status and the level of your "modified adjusted gross income". These income limits change year to year due to inflation adjustment. You can find these income limits in IRS Publication 590: Roth IRAs

Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your tax return modified as follows.

1.Subtract the following:

  • Conversion income. This is any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA.
  • Minimum required distributions from IRAs, (for conversions only).

2. Add the following deductions and exclusions:

  • Traditional IRA deduction,
  • Student loan interest deduction,
  • Tuition and fees deduction,
  • Domestic production activities deduction,
  • Foreign earned income exclusion,
  • Foreign housing exclusion or deduction,
  • Exclusion of qualified bond interest shown on Form 8815, and
  • Exclusion of employer-provided adoption benefits shown on Form 8839. [3]

Roth IRA Contribution Limits
Year Age 49 and Below Age 50 and Above
1998 $2,000 $2,000
1999 $2,000 $2,000
2000 $2,000 $2,000
2001 $2,000 $2,000
2002 $3,000 $3,500
2003 $3,000 $3,500
2004 $3,000 $3,500
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 $5,000 $6,000
2009 $5,000 $6,000

Beginning in 2009, contribution limits will be inflation-adjusted in $500 increments.

Other Limitations on IRA Contributions. These contribution limits apply to the total you can contribute to all of your IRAs. You cannot contribute the maximum amount to a traditional IRA and also make a contribution to a Roth IRA. The contribution maximum can be divided between the IRAs in any way you wish but the total cannot exceed the limit.

IRA contributions are also limited by the amount of your earned income. The total amount you can contribute to your IRAs cannot be greater than the amount of your earned income for the year of the contribution. For married couples filing jointly, the earned income of either spouse can be used to make the contributions to each person’s IRAs. It makes no difference which spouse has the earned income, but the total earned income cannot be less than the total of the IRA contributions for both individuals. The IRS defines earned income as the taxable income and wages you get for working. Either working for someone who pays you or working for a business you own. If you are working for someone else, earned income will be reported on line 3 of your W-2. If you are working for a business you own, your earned income is the net income reported on the Schedule C less 50% of the self-employment taxes you pay. Other types of income do not fit the definition of earned income and cannot be used for Roth IRA contributions.

Conversion to Roth IRA

Conversions from a Traditional IRA to a Roth IRA require one to pay the tax due (without penalty tax) on any previously untaxed Traditional IRA assets converted. For an analysis of the potential benefits of a conversion, see Roth IRA conversion. In general, conversions work best when one is in a low tax bracket and when the source of funds for paying the tax are available outside of the IRA. If the tax is paid out of the converted assets, the payment is considered an early distribution and is subject to both income tax, and if one is under age 59 1/2, a 10 percent penalty tax.[4]

You can convert a Traditional IRA to a Roth IRA if:

  • your Modified AGI (see above) does not exceed $100,000, and
  • you are not married filing separately.

The Modified AGI limit does not apply in 2010. Also, taxes on funds converted in 2010 can be paid over two years, 2011 and 2012 [needs a reference].

For the tax consequences of taking a distribution of converted assets see Distributions below.

For more complete information on conversions, refer to Fairmark's Roth IRA Guide: Conversions.

If one wishes to undo a conversion, one does so by executing an IRA recharacterization. Undoing a conversion might result from finding that:

  • One has earned too much income during the year to qualify for a conversion.
  • One finds that one does not have sufficient funds to pay the conversion tax.
  • The market value of the converted assets has fallen in price after the conversion and one can save tax by recharacterizing the conversion and then, in accordance with IRS restrictions, reconverting the assets at the lower value.

For more complete information on recharacterizations, refer to Fairmark's Roth IRA Guide: Roth Recharacterizations.


Order of Distributions

The amounts you withdraw from a Roth IRA are considered to consist of the following amounts, in the following order. In each case, you move to the next category when the lifetime total of distributions from all your Roth IRAs exceed the preceding category.

  • Regular contributions
  • Taxable portion of first conversion
  • Nontaxable portion of first conversion
  • Each subsequent conversion, in order, with the taxable portion coming out first for each conversion
  • Earnings (any increase in value occurring inside the Roth IRA) [5]

Treatment of Distributions

The tax treatment of the different categories of distributions may be summarized as follows:

  • Regular Contributions can be withdrawn at any time with no tax and no penalty.
  • Taxable Portion of a Conversion applies only when the lifetime total of withdrawals from all Roth IRAs exceeds the lifetime total of regular contributions to Roth IRAs plus the lifetime total of earlier conversions.
    • If withdrawn before the first day of the fifth year after the year of the conversion: no tax, but will be subject to 10% early withdrawal penalty if you're under age 59½ unless an exception applies. [6]
    • Beginning on the first day of the fifth year after the year of the conversion can be withdrawn at any time with no tax and no penalty.
    • Special rules apply to withdrawals of amounts converted in 2010.
  • Nontaxable Portion of Any Rollover
    • Applies only after the taxable portion of the same conversion has been withdrawn.
    • Can be withdrawn at any time with no tax and no penalty.
  • Earnings
    • Applies only after all amounts other than earnings have been withdrawn.
    • If withdrawn before the first day of the fifth year after the year you first established a Roth IRA, taxable as ordinary income; also subject to the 10% early withdrawal penalty if you're under age 59½ unless an exception applies.
    • Beginning on the first day of the fifth year after the year you first established a Roth IRA, can be withdrawn with no tax and no penalty if you're over age 59½ or otherwise meet the requirements for a qualified distribution (death, disability, first-time homeowner). Otherwise, withdrawals of earnings continue to be taxable as ordinary income and, unless an exception applies, subject to the 10% early withdrawal penalty. [7]
-Fairmark: Roth IRA Distribution Overview

While a Roth IRA does not impose required minimal distributions for the original Roth IRA owner, or for a spouse who elects to treat an inherited Roth IRA as one's own in a spousal rollover, non-spousal inheritors are required to take required minimal distributions of the Roth over their life expectancies.

In addition, there can be some tax consequences to taking distributions from a Roth IRA prior to age 59 1/2 or before the Roth has been held for a minimum of five years for both contributions as well as for each Roth conversion. The specific ordering rules for Roth IRA distributions and the tax consequences of the distributions are discussed in the sidebar quote box, courtesy of Fairmark.


  1. Penalty free withdrawals can also be made by instituting a defined series of Substantially Equal Periodic Payments from an IRA. See SEPP:Substantially Equal Periodic Payments.
  2. See Non-deductible Traditional IRA
  3. IRS Publication 590: Roth IRAs
  4. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.247. ISBN 0-9649440-7-3
  5. Fairmark: Roth IRA Distribution Overview
  6. Exceptions to the early withdrawal penalty tax on converted assets include total disability, or death. Choate, Natalie, "Life and Death Planning for Retirement Benefits 6th Edition 2006" p.248. ISBN 0-9649440-7-3
  7. Fairmark: Roth IRA Distribution Overview

External Links

Papers: Roth IRAs

Papers: Roth 401-k and Roth 403-b Plans