Roth IRAs

Roth IRAS are a powerful investment vehicle. The details of the Roth IRA, including contribution limits, income level restrictions and taxes on distributions are reviewed below. Before jumping into the details, if you max out a Roth IRA and get a 10% return here is how much you can expect in retirement. That is right, almost $1 million dollars after 30 years.

10 years   20 years 30 years
Future Value $87,655.84 Future Value $315,012.50 Future Value $904,717.12
Rate of return 10.0000% Rate of return 10.0000% Rate of return 10.0000%
Years 10 Years 20 Years 30
Yearly investment -5500 Yearly investment -5500 Yearly investment -5500

Roth IRA rules:

  • Contribution limits for 2016 are: $5,500 ($6,500 if over age 50)
  • Income level restrictions for 2016 are:

Roth IRA Limits

  • You CANNOT deduct the contributions to a Roth IRA
  • You can continue making contributions to a Roth IRA after age 70 1/2 (you cannot contribute to a traditional IRA after age 70 1/2).
  • There are no required minimum distributions (RMDs) when you turn age 70 1/2

Distributions

You can always take out the amount of money that you contribute to a Roth IRA without any penalty. The amount you contribute is never subject to income taxes! However, there are rules on taking out any money that is made through investing.

Qualified distributions on investment returns

You will incur a tax penalty if you take a distribution of any investment returns within five calendar years. Starting  your sixth calendar year, you are eligible to take distributions on investment returns without a tax penalty.

Additionally, you must meet one of the following to make a qualified distribution of an investment return:

  • Take a distribution after becoming disabled
  • Take a distribution after reaching age 59 1/2
  • A distribution to a beneficiary or your estate after your death, OR
  • a distribution for a purchase on your first home (up to $10k)

Non-qualified distributions on investment returns

Any distribution that does not meet the requirements above is subject to income tax. With a Roth IRA, it is important to note that any distributions you take will be from contributions first. Therefore, only the investment returns are subject to income tax (a non-qualified distribution).