A Roth IRA is a special type of individual retirement plan. It is subject to many of the same rules that apply to traditional individual retirement arrangements (IRAs). But there are some differences in the tax treatment of contributions and distributions. One of these differences is that unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But if you satisfy certain requirements, qualified distributions from a Roth IRA are tax-free.
The main tax advantage of a Roth IRA is that even though your contributions are not tax-deductible and are not reported on your tax return, your earnings can accumulate tax-free and qualified withdrawals are generally not taxable and can be made without a penalty.
Who Can Set Up and Contribute to a Roth IRA?
You can set up a Roth IRA regardless of your age. It must be designated as a Roth IRA when you set it up. In order to contribute to a Roth IRA, you must have taxable compensation and your modified adjusted gross income must be less than a certain maximum amount, defined based on your tax filing status. There is a phase-out of the contribution for modified adjusted gross income over a certain amount up to a maximum ceiling. Above the ceiling, contributions cannot be made. The amount you can contribute, subject to the maximums, is higher if you are age 50 or older. You can continue to make contributions to a Roth IRA after you reach 70 ½, and you do not have to make required withdrawals – you can leave amounts in your Roth IRA as long as you live.
Taxable Compensation
Taxable compensation for these purposes includes wages, salaries, tips, professional fees, bonuses, commissions, and other income received for providing personal services. Taxable compensation also includes self-employment income and alimony and separate maintenance payments.
Limits Based on Modified Adjusted Gross Income
The limits on modified adjusted gross income, and the amounts that can be contributed to a Roth IRA according to those limits, are published by the Internal Revenue Service (IRS) and can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs). The limit is highest for taxpayers who are married filing jointly or as a qualifying widow(er), and is lower for taxpayers filing as single or head of household, and taxpayers who are married filing separately but who did not live with their spouse. Taxpayers who are married filing separately and who lived with their spouse have the lowest limit on modified adjusted gross income.