A Roth IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An account must be designated as a Roth IRA when opened.
Roth IRA tax advantages and rules compared to a traditional IRA:
| Roth IRA Contribution Limits—2023 | ||||
|---|---|---|---|---|
| Lesser of: Taxable compensation for the year, or: | ||||
| ||||
Generally you can contribute to a Roth IRA if you have taxable compensation and income less than the top of the phaseout range for your filing status, see Roth IRA Phaseouts chart, below.
| Roth IRA Phaseouts—2023 | ||
|---|---|---|
| Filing Status | MAGI | Contribution Limits |
| Single, Head of Household, or Married Filing Separately (lived apart from spouse all year) | Less than $138,000 | Up to $6,500 ($7,500, age 50 and older) |
| At least $138,000, but less than $153,000. | Contribution limit reduced.* | |
| $153,000 or more | Cannot contribute to Roth IRA. | |
| Married Filing Jointly or Qualifying Surviving Spouse | Less than $218,000 | Up to $6,500 ($7,500, age 50 and older). |
| At least $218,000, but less than $228,000. | Contribution limit reduced.* | |
| $228,000 or more | Cannot contribute to Roth IRA. | |
| Married Filing Separately (lived with spouse at any time during the year) | Zero. | Up to $6,500 ($7,500, age 50 and older). |
| More than zero, but less than $10,000. | Contribution limit reduced.* | |
| $10,000 or more. | Cannot contribute to Roth IRA. | |
*To calculate reduced contribution limit:
| Example: Bob, age 35, Single, $140,000 MAGI:
|
Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments.
Contributions. Total contributions are combined with traditional IRA contributions to determine limits. For example, a $1,000 contribution to a traditional IRA will reduce total contributions allowable to a Roth IRA by $1,000. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit.
If your modified AGI is within the phaseout amounts, your contribution limit is gradually reduced.
You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). This means that most people can make contributions for 2023 by April 15, 2024.
Conversion Rules
There are no modified AGI limits or filing status requirements relating to rollovers from eligible retirement plans into Roth IRAs.
Conversion contribution. Money distributed from a qualified plan or IRA and reinvested within 60 days into a Roth IRA is called a conversion contribution. The distribution is taxable to the extent it does not represent a return of nondeductible basis. A conversion contribution is not subject to the 10% early withdrawal penalty. A conversion contribution can also be accomplished through a trustee-to-trustee transfer or a same trustee transfer where the trustee simply redesignates a traditional IRA as a Roth IRA rather than open up a new account or issue a new contract.
Income. In the year of conversion, the amount of the distribution from a traditional IRA or employer plan converted to a Roth IRA is included in gross income.
Employer plan conversions. Money in an employer-sponsored retirement plan, such as a 401(k), annuity, section 403(b) plan, government deferred compensation (§457 plan), or profit-sharing plan, may be directly converted to a Roth IRA.
Inherited IRA. An inherited traditional IRA from someone other than a spouse cannot be converted into a Roth IRA.
A nontaxable qualified distribution is any payment or distribution from a Roth IRA that meets the following requirements.
Additional tax on early distributions. If you receive a nonqualified distribution, you must pay the 10% additional tax on early withdrawals penalty on the taxable part of any distributions. Exceptions apply.
Nonqualified distributions. A distribution from a Roth IRA that is not qualified may be partly taxable or nontaxable as there is a set order in which contributions and earnings are considered to be distributed from a Roth IRA. The order is as follows:
Distributions from a Roth IRA that are a return of regular contributions are not subject to tax or penalty, no matter when they are withdrawn. Only the portion of the nonqualified distribution allocable to earnings may be subject to tax and the 10% additional tax.
You are not required to take distributions from your Roth IRA at any age. The required minimum distributions (RMD) rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive.
An IRA is an individual retirement arrangement. It is a personal savings plan that gives you tax advantages for setting aside money for retirement. An IRA is referred to as a traditional IRA if it is not a Roth IRA or a SIMPLE IRA. Traditional IRAs include SEP IRAs.
Inherited IRA choices. As a designated beneficiary, you have choices when inheriting a traditional IRA.
Generally, you can only contribute to a Roth IRA if you have taxable compensation and income less than the top of the phaseout range for your filing status (see chart below). If your income is greater than that threshold amount, you are prohibited from contributing directly to a Roth IRA.
