Who is eligible for a Roth IRA?
Most individuals with earned income may establish a Roth IRA. There are no age limits, as there are with a Traditional IRA.
However, eligibility to make contributions is subject to income limits; the limits for tax year 2018 are:
- For single filers, MAGI* must be below $135,000. Eligibility begins to phase out at $120,000.
- For joint filers, MAGI must be below $199,000. Eligibility begins to phase out at $189,000.
How much may be contributed annually?
Individuals may contribute $5,500 or 100% of earned income annually, whichever is less.
Married couples may contribute up to a total $11,000 annually ($5,500 for each spouse), if both have earned income.
Single-income married couples may contribute up to a total $11,000 annually, as long as:
- They file a joint return
- Have combined earned income that equals the amount contributed
- No more than $5,500 goes into either account
Each person age 50 or over may make a “catch-up” contribution of an additional $1,000.
You may have both a Roth IRA and a Traditional IRA, which is helpful if your income level makes you only partially eligible for a Roth. However, your Roth contribution maximum is reduced by any contribution you make in the same year to a Traditional IRA.
Contact your Wealth Advisor for more details.
Tax-deferred potential growth, tax-free qualified distributions
While the money you contribute to a Roth IRA is never tax deductible, qualified distributions are tax-free.
The IRS imposes a 10% tax penalty as well as income tax on the portion of any non-qualified distribution that represents account earnings. The 10% penalty does not apply if you: are age 59 1⁄2 or older; take withdrawals in substantially equal periodic payments based on your life expectancy; are disabled or die; use the money for a first-time home purchase ($10,000 lifetime limit), or medical insurance coverage while unemployed (subject to certain limits); or are paying medical costs exceeding a specified percentage of your AGI.
Starting at age 59 1⁄2, you can withdraw earnings from your Roth IRA free from federal income tax—as long as your first contribution to any Roth IRA was made at least five years earlier. You don’t pay any current federal income tax on the interest, dividends or capital gains earned in your Roth IRA.
Unlike the Traditional IRA, which requires that you begin to take minimum distributions when you reach 70 1⁄2, the Roth IRA does not require you to take any distributions in your lifetime.
Estate planning advantages
Just as qualified distributions from your Roth IRA would be free from federal income tax for you, they retain that tax-free status when they go to your beneficiaries—though estate taxes may apply.
While your beneficiaries are required to take distributions from your Roth IRA following your death, they have choices as to how they do this:
- Withdraw the entire account as a distribution, which is excludable from gross income for federal income tax purposes if the five year holding period rule is satisfied; or
- Continue the account—along with its tax-free growth potential—as long as the minimum required distribution rules are followed.
Converting your Traditional IRA to a Roth
You are eligible to convert Traditional IRA assets to a Roth IRA—whether you’re single or married and filing jointly— without limitations based on your income.
When you make the conversion, the full amount of any tax-deductible contributions and all earnings become taxable in that year.
Not sure which type of IRA is best for you?
Your Hilliard Lyons Wealth Advisor can help you determine which type of IRA is best suited for your needs. Because of the tax implications of an IRA, it is also wise to consult your tax advisor.
*Modified Adjusted Gross Income
Securities offered through J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA & SIPC. Hilliard Lyons does not offer tax or legal advice. Please consult your tax advisor or attorney before making any decision that may affect your tax or legal situation. © 2018 J.J.B. Hilliard, W.L. Lyons, LLC.
J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA, & SIPC