You've probably heard that Roth IRAs grow magical money. OK, maybe they are not quite magical.
But Roth IRAs have a lot to offer: tax-free growth. The flexibility to access your posts in an emergency. The fact that at 59 ½ years you can withdraw your money according to your schedule – and not according to a proposal by the IRS.
But while we could sing the praise of the Roth IRA all day long, let's be honest: whenever the IRS grants us tax breaks and flexibility, it sets a lot of rules.
Let's talk about the Roth IRA rules you need to know.
What is a Roth IRA? A short introduction
ON Roth IRA is a kind of individual retirement account. Like a traditional IRA, a Roth IRA is a retirement savings account that you set up to invest and save. Unlike a 401 (k), an IRA is not associated with your job.
Here is the most important thing you need to know Roth IRAs vs traditional IRAs: You now pay taxes with a Roth IRA. If you continue to make a contribution (ideally to the maximum every year!), Your money goes up. When you retire, this nest egg belongs to you. They have already relieved the government.
A traditional IRA is now reducing your taxable income. But your taxes are due when you withdraw your money.
For a long time, 401 (k) were like traditional IRAs because you had the tax relief in advance, but paid taxes when retired. But a growing number of employers jump on the Roth train and with a Roth 401 (k),
10 Roth IRA rules that you should know in 2020
After you know the basics of the Roth IRA, you can get to know the Roth IRA rules.
Note: The IRS updates the Roth IRA boundaries about income and inflation contributions every year. In addition, the rules do not change significantly.
1. You can donate up to $ 6,000 if you are younger than 50 years old
The maximum contribution for Roth and traditional IRAs in 2020 is $ 6,000 if you are under 50 years of age. Total contributions between the two accounts should not exceed $ 6,000.
2. Over 50? You will receive an additional contribution of $ 1,000
According to the IRS, taxpayers over the age of 50 can make an IRA catch-up contribution. By 2020, this amount will remain at $ 1,000.
3. You can not contribute if your income exceeds these limits
Everyone with taxable income can contribute to a traditional IRA. However, you can not contribute to a Roth IRA if your income is above a certain threshold. (There is a way to get around the income restrictions, but we'll come back to that shortly.)
The IRS has adjusted the income limits for 2020 to inflation, which means you can earn slightly more than in 2019 and still qualify for a Roth IRA. Here are the income limits for 2020.
2020 Roth IRA income limits
Status of tax return
Single parent, householder or married applicant separated
Under 124,000 US dollars
$ 6,000 ($ 7,000 if 50 or older)
124,000 to 138,999 US dollars
Over $ 139,000
Married joint filing or qualifying widow
Under 196,000 US dollars
$ 6,000 for each person ($ 7,000 if 50 years or older)
196,000 to 205,999 US dollars
Over $ 206,000
Separately married registration (lived sometime in the tax year with the spouse)
Under $ 10,000
10,000 USD or higher
4. … but you can handle income limits with a Backdoor Roth IRA
If you're earning too much to directly fund a Roth IRA, you can open a so-called backdoor Roth IRA. They finance a traditional IRA and then turn it into a Roth IRA.
You owe taxes on the converted amount (remember, you have not yet paid taxes on these traditional IRA dollars) and tax on profits from investing in your traditional IRA.
Opening a back door for Roth IRA is complicated and can have serious tax consequences. Therefore, we always advise consulting a tax expert and financial planner first.
If you have a 401 (k), you can also lower your taxable income by increasing your contributions. The 2020 limits are $ 19,500 if you are under 50 years old, or $ 26,000 if you are over 50 years old.
5. There is a penalty for too much contributions
If you make a contribution that goes beyond the Roth IRA rules, you will be charged a penalty of 6% each year if there is any additional funds in your account.
6. You can access your posts at any time
Since your Roth IRA contributions have already been taxed, this money is always yours. This means you can access your posts in an emergency, although we recommend Building a emergency fund separated, so that you can make this Roth IRA always thicker.
7. You will be penalized if you touch your income before the age of 59 1/2
If you withdraw Roth IRA earnings (but not your contributions) before your 59th birthday, you will generally pay income tax plus a 10% penalty.
Then there is the five-year rule: you must have your account open for at least five years before you can withdraw your income without paying taxes and a 10% penalty.
If you withdraw money from a Roth IRA, your contributions will always be deducted before your earnings.
8. But wait! There are exceptions
You can withdraw up to $ 10,000 of your Roth IRA income for a first home purchase without penalty before you are 59 ½ years old if you have had the account for at least five years.
In some other cases, you may be able to use your income early without any taxes or fees:
They use it for certain educational expenses for themselves or a family member.
You have medical expenses that make up more than 10% of your adjusted gross income.
They become unemployed and use the money for health insurance premiums.
9. You can contribute forever if you have taxable income
For a traditional IRA, your contributions must stop when you are 70 ½ years old. But with a Roth IRA, you can sustain these contributions as long as you have taxable income, such as: Salary, hourly wages, bonuses or gratuities.
10. You never have to withdraw your own money
Conventional IRAs and 401 (k) require you to start withdrawing money when you are 70 ½ years old by considering what is known in the tax return as a required minimum distribution or RMD.
But with a Roth IRA you never have to withdraw money. You can still save your money or pass it tax-free to your heirs when you die. If you leave your Roth IRA to your spouse, no RMDs threaten. However, if you leave this to someone else, they will eventually have to make distributions.
Ready, finance your Roth IRA
When you're ready to take full advantage of this Roth IRA magic, you may have more time than you think.
The deadline for financing a Roth IRA for a calendar year is the tax day of the following year. So you can continue working on maximizing your contribution to 2019 by April 15, 2020.
A high on the financing of your future in 2020 and beyond.
Robin Hartill is senior editor at The Penny Hoarder. She edits and writes stories about bank accounts, credit scores, home ownership, insurance, investments, retirement and taxes. She is also the voice behind the "Dear Penny Personal Advice" column, which is summarized in the "Tampa Bay Times Sunday" division.
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