A Roth IRA is an individual retirement account named for the late Senate Finance Committee Chairman William Roth, Jr. This type of IRA offers different tax incentives than a Traditional IRA to boost your retirement savings.
How does a Roth IRA work?
Unlike Traditional IRAs, contributions to a Roth IRA are never tax-deductible. But the money in your Roth IRA can be withdrawn tax-free at any time. And if you qualify, you can withdraw the earnings tax-free too. Money contributed has already been taxed. So, the principle amount is not subject to taxes or penalties in the future, as long as you stay within the contribution guidelines.
Choose the Roth IRA daily account – you can add to your account at any time (up to IRS maximums) or choose a 12 month certificate to earn a fixed dividend rate.
No distribution requirements.
Are you eligible to contribute to a Roth IRA?
You are eligible to contribute if
- you (or your spouse is filing a joint tax return) earn compensation from employment, and
- your earned compensation (or you and your spouse’s combined compensation is filing a joint tax return) is less than or within the applicable IRS limits.
Can you remove your Roth IRA assets into another plan?
No. Movement of Roth IRA assets to qualified retirement plans, 403(b) plans, governmental 457(b) plans, and SIMPLE IRAs is not allowed. Under certain restrictions, a Roth IRA contribution can be re-characterized as a Traditional IRA contribution.
Can you move money from one Roth IRA to another Roth IRA that you own?
Yes. A transfer or rollover between your Roth IRAs is always tax-free and can be done regardless of your income.
Can you move money from your Traditional IRA to a Roth IRA?
Yes. Moving of Traditional IRA assets into a Roth IRA is called a conversion, which generally is a taxable transaction. Any deductible (pretax) portion of your Traditional IRA that enters a Roth IRA must be included with your taxable income on your federal income tax return for the year the conversion takes place. You also need to complete and attach IRS Form 8606, Nondeductible IRAs, to your income tax return. Note that if the conversion is completed properly, you do not have to pay an early distribution penalty tax, even if you are under age 59 1/2.
Will you ever be required to withdraw money from your Roth IRA?
No. Unlike Traditional IRAs assets, you are never required to take minimum distributions from a Roth IRA upon reaching a certain age. If you don’t need the cash, you can let your money continue to grow tax-free for as long as you like. Your beneficiaries, however, must take minimum distributions following your death.
All withdrawals, including earnings, are tax-free if the account has been open at least 5 years and are used for qualified expenses.
What is the penalty for withdrawing money from your Roth IRA before satisfying the tax and penalty-free requirements?
Early withdrawal made before satisfying the tax and penalty free requirements are subject to 10 percent penalty unless you meet one of the IRS’ early distribution penalty tax exceptions:
- Payments made to your beneficiaries after your death, first-time home purchase, qualified higher education expenses, unreimbursed medical expenses, substantially equal periodic payments, disability, health insurance premiums during unemployment, IRS levy, qualified reservist distribution.