Contributions to individual retirement accounts (IRAs) and 401 (k) accounts are limited by law, in part so that people with high incomes benefit no more than the average worker. Of course, as with other tax-advantaged retirement plans, the Internal Revenue Service (IRS) has specific rules regarding Roth IRAs. These rules cover contribution limits, income limits, and how you can withdraw your money. Under certain conditions, Roth IRAs also allow tax-free withdrawals of earnings, which are taxable in a traditional IRA.
You may or may not be able to claim a deduction from your traditional IRA contributions, depending on whether you or your spouse are covered by an employer-sponsored retirement plan, your filing status, and your modified adjusted gross income (MAGI). You pay taxes on your dollars before you contribute, but you get tax-free growth and withdrawals in retirement. Account holders also have three years to pay the tax due on withdrawals, rather than due it in the current year, or they can refund the withdrawal and avoid owing any tax even if the amount exceeds the annual contribution limit for that type of retirement account. The incentive to contribute to a roth ira is to generate savings for the future, not to get a current tax deduction.
A Roth Individual Retirement Account (IRA) can be a great way to save money for your retirement years. As long as you continue to work, there is no age limit on how you can contribute to a traditional IRA. In addition to the general contribution limit that applies to both Roth IRAs and traditional IRAs, your Roth IRA contribution may be limited based on your filing status and income. For example, those tax-free Roth withdrawals in retirement will not contribute to your taxable income, which is used to determine how much you pay for Medicare, including surcharges (also known as monthly income-related adjustment amounts or IRMAA).
You can withdraw your Roth IRA contributions at any time, for any reason, without having to pay taxes or penalties. If you file a joint return, you may be able to contribute to an IRA even if you didn't have taxable compensation while your spouse did. You should also note that the deadline for IRA contributions for any given fiscal year is tax day, usually around April 15 of the following calendar year. By paying taxes on those contributions while your income or tax rate is lower, you'll get the benefit of tax-free money later, when it counts higher.
Couples with very disparate incomes may be tempted to add the name of the highest-earning spouse to a Roth account to increase the amount they can contribute. If your income is above certain thresholds, you may not be eligible for a Roth IRA or your contributions may be limited. So, if you have the money and meet income limits, you can contribute to a 401 (k) plan at work and then contribute to your own Roth IRA account.