What is a Roth IRA?
A Roth IRA is a special type of retirement account that allows your monetary contributions and interest earnings to grow tax free.
You can contribute to a Roth IRA at any age if you, or your spouse, file your income taxes jointly or have taxable income. Taxable income is any income (including wages, salary, commission, and alimony), and your modified adjusted gross income is below a certain amount specified by the IRS.
Roth IRAs are funded with your after-tax dollars, and you can make tax-free and penalty-free withdrawals after age 59 and one-half.
If you’re ready to start earning money with a Roth IRA account, we can help! At Credit Union of Southern California (CU SoCal), we make getting a Roth IRA account easier.
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Read-on to learn more about Roth IRA income limits, Roth IRA eligibility requirements and Roth IRA withdrawal rules.
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How do Roth IRAs work?
Roth IRAs are available from financial institutions and brokerage companies. There are tax rules associated with
individual retirement arrangement (IRAs) which are enforced by the U.S. Internal Revenue Service (IRS).
There is no minimum dollar amount needed to open a Roth IRA account. For example, you may start an account with $50. Roth IRAs have annual contribution limits, meaning there’s a maximum amount you can contribute to a Roth IRA each year.
Because a Roth IRA account is funded with after-tax dollars, the account will grow tax free. Roth IRA withdrawal rules state that you can withdraw your contribution amount at any time, but not withdraw the earnings without a penalty. There are specific Roth IRA withdrawal rules and tax rules related to when earnings can be withdrawn.
Qualified withdrawals are tax and penalty free. Your financial institution or tax professional can provide tax guidance if you want to make a withdrawal and are not sure if there will be a penalty.
It’s important to note that funding your Roth IRA account is just the first step. You will also need to choose the investments you want in your account, such as stocks, bonds, mutual funds, etc.
Roth IRA account eligibility requirements
A representative with the financial institution you choose will make sure you meet the Roth age limit and account requirement, discussed below. To open an account, you will need to provide proof of identity and your social security number. Again, there is no age requirement for opening a Roth IRA account.
Roth IRA account rules
There are Roth IRA contribution rules, withdrawal rules, and Roth IRA income limits that govern how these accounts work. This includes:
5-year rule. For Roth IRA account earnings to be tax free, the account holder must have the account for more than five years or before or before the age 59 and one-half. If you do withdraw earnings before this age, you will be required to pay income taxes and a 10% early withdrawal penalty on the earnings you withdraw.
Contribution rules. The IRS determines how much can be contributed each tax year.
The most you can contribute to all your traditional and Roth IRAs is the smaller of these dollar amounts:
- For 2022: $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.
- For 2023: $6,500, or $7,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.
Withdrawal rules. Roth IRA withdrawal rules are based on the amount of time you have the account and the age at which you withdraw the earnings. You may withdraw the contribution portion at any time without penalty.
Withdrawal penalties. There are exceptions to paying a penalty if you meet certain conditions, including buying your first home, paying for education expenses, paying for expenses related to a birth or adoption, or you become disabled. Before you withdraw any funds from your Roth IRA account, be sure to check with a tax professional to see if your situation qualifies for waived penalty fees.
Roth IRA income and contribution limits
The income limits for individual tax filing in the 2022 tax year is $144,000. In 2023, the limit will be $153,000.
The 2022 income limit for married couples filing jointly is $214,000
In 2023, the limit will be $228,000, for married couples filing jointly.
The contribution limits for Roth IRAs
The most you can contribute to all your traditional and Roth IRAs is the smaller of:
- For 2022, $6,000, or $7,000 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.
- For 2023, $6,500, or $7,500 if you’re age 50 or older by the end of the year; or your taxable compensation for the year.
Roth IRA advantages
Roth IRAs are very popular due to their many advantages, including:
No required minimum distributions. This refers to the requirement to begin withdrawing money from your IRA when you reach a certain age. Other types of IRAs, such as traditional and 401(k)s, do have minimum distribution requirements, but Roth IRAs don’t require that the money be taken out of the account.
Penalty-free contribution withdrawals. You will not pay a penalty if you withdraw any part of the amount you have contributed and leave the earnings potion in the account. Withdrawing earnings before the allowable timeframe (five years) will result in a penalty unless you meet the exception criteria specified by the IRS.
No income tax on inherited Roth IRAs. Inherited accounts and the funds are not taxable.
No age limits. You can open a Roth account at any age, and you can leave funds in your Roth IRA for as long as you live.
More time to contribute. You can make contributions to your Roth IRA after you reach age 70 and one-half.
Tax-free distributions. Because the contributions into your account were already taxed, withdrawals (i.e., distributions) are tax-free.
Roth IRA Disadvantages
No up-front tax breaks. Because you already paid tax on the money (from your income or other earnings) there is no additional tax break.
Earnings withdrawal restrictions. Earnings cannot be withdrawn without penalty before age 59 and one-half unless certain exceptions apply.
Income limits. There are income thresholds, which means that high-income individuals are not eligible for a Roth IRA.
Low maximum contributions. As we stated above, the maximum annual contributions allowed are low.
Roth IRA vs. Traditional IRA vs. 401(k): what's the difference?
Roth IRA. As we’ve discussed in this article, a Roth IRA has certain age and income requirements, and the earnings are taxed differently than those of a traditional IRA.
Traditional IRA. The tax benefit people get is related to the amount of their contribution, which is why many people contribute at the end of a tax year, to reduce their taxable income. Because the account contributions come with a tax benefit, you pay income tax when you ultimately withdraw the money. Unlike a Roth IRA, traditional IRAs have no income limits to open one.
401(k). These accounts are employer-sponsored, meaning that employees make contributions into specific plans offered by their employer through a brokerage company that has partnered with the employer. Some employers will match employee contributions, to help their employees save more for retirement. Like traditional IRAs, a 401(k) is tax deferred until the money is withdrawn in retirement. A 401(k) may be rolled over into a traditional IRA or Roth IRA if you leave that employer.
Are Roth IRAs insured?
If the Roth IRA account is held at a bank it is insured by the Federal Deposit Insurance Corporation (FDIC). When a Roth IRA account is opened at a credit union, it is insured by the National Credit Union Administration (NCUA).
Both FDIC and NCUA insure Roth IRAs up to $250,000.
It’s important to note that the deposit insurance amount of $250,000 is provided per depositor, per FDIC-insured bank, per ownership category.
Credit union members can be confident their accounts are fully protected. NCUA also operates and manages the National Credit Union Share Insurance Fund (NCUSIF). Backed by the full faith and credit of the U.S. government. This means your credit union share accounts and retirement accounts are protected.
For example, if you have a regular share account and a Roth IRA account at the same credit union, the NCUSIF insures the regular share account for up to $250,000 and the Roth IRA for up to an additional $250,000.
What is a Spousal Roth IRA?
You may fund a Roth IRA on behalf of a non-employed or low-wage-earning spouse, or even if your spouse doesn't have taxable income.
To do so, you would open the Roth IRA in a separate account and set it up in your spouse's name. You must be married and filing a joint tax return to open a spousal IRA.
Can you have more than one Roth IRA?
Yes,
there is no limit to how many IRAs you can have, but there is a limit on the amount of money you can contribute in total to your IRAs.
How to start a Roth IRA
Opening a Roth IRA is easy, and you may do so at a credit union, bank, brokerage company, or employer. You will need to show proof of identity and your social security number.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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