To open a Roth IRA, one must meet specific eligibility criteria. First, only those who earn income through wages, salaries or commissions can contribute. Passive income, like from rentals or investments, doesn’t qualify. The modified adjusted gross income (MAGI) also plays a role. Single filers must have a MAGI below $139,000, and joint filers, it must be under $206,000. Roth IRAs do not have age restrictions like traditional IRAs. Contributions can be made at any age as long as the MAGI requirements are met. Roth IRAs do not have mandatory minimum distributions. This allows for more flexibility, and also tax-free inheritance.
Roth IRA Contribution limits
In 2021, people under 50 can contribute up to $6,000 while those over 50 can add an additional $1,000. This makes their contribution cap $7,000. If both spouses have Roth IRAs, they can contribute these amounts individually, effectively doubling the total contributions. There is a catch. You may not be able to contribute if your MAGI exceeds certain thresholds. Regularly checking the IRS guidelines ensures you know how much you can contribute annually.
Tax Benefits of Roth IRA
Roth IRAs offer several tax benefits. Withdrawals are usually tax-free since contributions are made after-tax. Strategic planning can even help avoid taxes on the IRA’s earnings. This is particularly helpful if your retirement tax bracket will be higher. One can also withdraw their contributions (not earnings) from a Roth IRA anytime without penalties, offering more financial flexibility. Both contributions and earnings are tax-free after age 59 1/2 and if you have had the account open for five years. However, withdrawing earnings before this time might incur taxes and penalties. Proper financial planning can help maximize these benefits.