Saving in a tax-advantaged retirement account, like a
Here's a breakdown of how Roth IRA taxes work during the life of the account: when you make contributions, take withdrawals, or decide to do a Roth conversion.
Are Roth IRA contributions tax-deductible?
Unlike its counterpart the
There are limits to the amount you can contribute to a Roth IRA. The 2024 contribution limit is $7,000, with an additional $1,000
However, some people are not allowed to contribute at all if their income is too high. Before you deposit money into a Roth IRA, you need to ensure you are eligible.1
While putting money into a Roth IRA does mean you pay taxes now, you can reap some significant tax-free benefits when it comes to withdrawal time.
Are Roth IRA withdrawals taxable?
Roth IRA withdrawals, also known as distributions, offer more flexibility than traditional accounts but have more nuances:
Roth IRA contributions can be withdrawn at any time
Since you've already paid the income tax on the dollars you put into a Roth IRA, you're allowed to withdraw up to the total amount of your contributions at any time. You don't have to wait until you've reached any specific age, and you can use those funds for any purpose.
Withdrawal of Roth IRA earnings have the potential to be tax-free
In a Roth IRA, you don't pay taxes on any investment growth or earnings while your money remains in the account. If you make a qualified withdrawal (you meet
If your withdrawal is not qualified, the earnings portion of the withdrawal will be subject to your income tax rate when you report your taxes for the year. It depends on which qualifications you meet:
- If you haven't met the five-year rule, your earnings will be taxed regardless of reaching age 59½ or not.
- If you have met the five-year rule but haven't reached age 59½, your earnings will be taxed unless you meet one of three conditions: you're making a first-time home purchase ($10,000 lifetime maximum), you've become disabled or you've died.
Roth accounts do not require required minimum distributions
The government doesn’t impose
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Taxes with a traditional-to-Roth-IRA conversion
Directly contributing to a Roth IRA isn't the only way to fund one. You also can convert money held in a tax-deferred retirement account, like a traditional IRA, into a Roth IRA.
When you do, the amount you convert is included in your taxable income for that year. But then that amount becomes just like any other money in your Roth IRA and can grow and be withdrawn tax-free.
Facing the
- Conversions are not subject to income or dollar amount limitations the way contributions are. Anyone can convert any amount they have available to them regardless of their income.
- There is a different five-year rule that applies to conversions. If you withdraw any amount of your converted dollars within five years, the money will be subject to the early withdrawal penalty if you are younger than 59½ or an exception applies. Unlike the other five-year rule that only needs to be satisfied once, each conversion has its own five-year clock.
Roth IRAs can be tax-efficient estate planning tools
Although Roth IRAs are intended for retirement savings, they can play a significant role in
If you were to leave a beneficiary a traditional IRA, the money they take out would be taxable. With a Roth IRA, however, your beneficiaries may be able to take withdrawals tax-free.
Most IRA beneficiaries are required to withdraw all the money within 10 years, but spouses who inherit IRAs and certain others have more flexibility.