It is never too early or too late to start thinking about your retirement. While many employers offer a variety of retirement plans—most commonly 401(k) plans—and Social Security benefits provided by the government, Individual Retirement Accounts (IRAs) are another individual retirement option one should consider with their financial advisor or accountant. IRAs can provide a means to grow retirement income, while providing potential tax benefits.

There are several types of IRAs. The two most common are: traditional IRAs and Roth IRAs. This month’s blog will focus on the basics of Roth IRAs, while traditional IRAs will be covered in the next month’s blog.

Roth IRA basics

  • Age restrictions: There are no age restrictions. One can contribute to Roth IRAs at any age.
  • Income implications: An individual must have taxable income or be self-employed to start and fund a Roth IRA. Furthermore, the ability to contribute is phased out when the taxpayers modified adjusted gross income reaches a certain limit. In 2017, a single taxpayer’s phase out range is $118,000 to $133,000 and married filing jointly taxpayers’ range is $186,000 to $196,000.
  • Contribution limits: For 2017, the contribution limit is $5,500 for those under 50 years of age. If you are 50 or older, you can make an additional “catch-up” contribution of $1,000, for a total contribution of $6,500.
  • Tax deductibility: Contributions to a Roth IRA are not tax deductible.
  • Taxes on withdrawals: When you make a withdrawal of the principal from a Roth IRA, it is not taxable. Withdrawing earnings from a Roth IRA is not taxable as long as you have reached 59 ½ years of age and satisfied a 5 year holding period.
  • Early distributions: There is no penalty for withdrawing your principal before 59 ½ years of age. Early distributions of earnings, however, are subject to a 10% penalty. There are certain exemptions for a qualified first-time home purchase and college expenses.
  • Required Minimum Distributions (RMDs): Roth IRAs do not require minimum distributions during one’s lifetime.
  • Traditional IRA conversion to Roth IRA: A taxpayer can convert a traditional IRA to a Roth IRA. Generally, the amount converted will be included in taxable income in the year of the conversion, but the 10% penalty does not apply. This may be beneficial if the taxpayer is currently in a low tax bracket and expects to be in a high tax bracket during retirement when the IRA money will be withdrawn.

As with any financial decision you make, it is advised that you review your retirement plan with your financial and tax advisor.