Roth IRAs

The Roth IRA became available to taxpayers in 1998. The Roth IRA is unique in that contributions to the IRA do not qualify for a deduction, but if the owner meets certain requirements, he or she may take qualifying distributions from the IRA without owing federal income tax on those amounts.

Joint filers with Modified Adjusted Gross Incomes (MAGI) above $188,000 and single taxpayers with MAGIs above $127,000 cannot contribute to Roth IRAs. Eligibility to contribute begins to phase out when joint Modified AGI reaches $178,000, and when single-filer MAGI reaches $112,000. The annual contribution limit for a Roth IRA is the same as for traditional IRAs, but must be reduced by any contributions made to traditional IRAs for the year. Active participants in an employer-sponsored qualified retirement plan may contribute to a Roth IRA if otherwise eligible without regard to the MAGI phaseout range for active participants contributing to a traditional IRA. Owners may withdraw contributions at any time without taxation or penalty.

The following chart summarizes the annual contribution limits for Roth IRAs, which hinge on the taxpayer’s filing status and MAGI level:

Taxpayer’s Modified AGI Level* (2013)
Married Filing Jointly Single or Head of Household Contribution Limit (2012)
0 to $178,000 $178,000 to $188,000 $188,000+
0 to $112,000 $112,000 to $127,000 $127,000+
$5,500 ($6,500 for age 50+) reduced** -0-

*The taxpayer’s AGI is determined without regard to any deduction for contributions to a traditional IRA, and without regard to any income resulting from the conversion of a traditional IRA to a Roth IRA. This is a Modified AGI. For a Roth IRA, the contribution limits based on MAGI apply regardless of whether the taxpayer or spouse is an active participant in an employer’s qualified retirement plan. The MAGI phase-out range for taxpayers who are married filing separately is zero to $10,000. If such a taxpayer’s AGI is more than $10,000, a Roth IRA contribution is not permitted. The applicable dollar limits in the MAGI levels listed above are inflation-indexed, with any increase being rounded to the nearest multiple of $1,000.

**For taxpayers in the middle range whose contribution limit is reduced: multiply $5,500 (or $6,500 if age 50 or over) by a fraction, the numerator being the excess of the taxpayer’s MAGI over $178,000 if married filing jointly or $112,000 if single or head of household, and the denominator being $10,000 if married filing jointly or $15,000 if single or head of household. Subtract the result from $5,500 ($6,500 if 50+) to get the maximum contribution by the taxpayer; however, a $200 minimum contribution may be made when the AGI phase-out lowers the contribution limit to less than $200 but more than zero.

After the owner has had a Roth IRA for at least five years, the earnings may generally be withdrawn federal income tax free—

  • after the owner reaches age 59½,
  • following the owner’s death,
  • following the owner’s disability (as defined by the Internal Revenue Code and tax regulations), or
  • if used for qualifying first-time homebuyer expenses ($10,000 lifetime maximum).

Note: there are two limited exceptions for distributions taken by military reserves called to active duty and public safety employees who separate from service after age 50.

Distributions from all Roth IRAs are subject to an ordering rule, no matter which Roth IRA the distribution is taken from: contributions first, then conversion amounts included in income (on a FIFO basis), then conversion amounts not included in income (on a FIFO basis), and finally earnings. In other words, the nontaxable portion of a person’s Roth IRA is exhausted before a distribution is deemed taxable.

Owners may convert Traditional IRAs into Roth IRAs, but the distribution from the traditional IRA will be subject to federal income tax when received. However, the 10% premature distribution tax will not be imposed unless funds are withdrawn from the Roth IRA within five years of each year’s conversion amount. If the taxpayer is under age 59½ at the time of the distribution of the converted amount, the distribution will be subject to a 10% penalty tax unless one of the IRC Sec. 72(t) exceptions applies.

Beginning January 1, 2010, there is no AGI limit that restricts the conversion of a traditional IRA to a Roth IRA, and married taxpayers filing separately are no longer prohibited from making the conversion.

The required minimum distribution rules [IRC Sec. 401(a)(9)(A)] that apply to traditional IRAs and qualified retirement plans do not apply to lifetime distributions from Roth IRAs. Thus, distributions need not begin by April 1 of the year following attainment of age 70½. Further, contributions may continue beyond age 70½ if the individual or spouse is still working. Beneficiaries must take minimum distributions after the death of the Roth IRA owner.

Roth IRA Traditional IRA
Maximum contribution (2013):
age 49 and under $5,500** $5,500**
age 50 and over $6,500** $6,500**
Contributions allowed after age 70½? yes no
Maximum deduction (2013):
age 49 and under zero $5,500*
age 50 and over zero $6,500*
Active participant in employer plan? irrelevant important
Joint return phaseout range (2013) $178,000-188,000 $95,000-115,000*
Single taxpayer phaseout range (2013) $112,000-127,000 $59,000-69,000*
Tax-deferred earnings? yes yes
Income tax-free withdrawals after 5 years? yes, potentially no
Withdrawals after age 59½ without 10% penalty? yes, potentially yes, potentially
Required minimum distributions after age 70½? no yes

*For tax-deductible contributions.

**Lesser of this dollar limit or 100% of earned income.