Roth IRA Benefits: Are You Eligible?

Boosting your retirement savings with an account that allows for tax-free growth and tax-free withdrawals sounds pretty great, right?

That's what a Roth IRA offers: after-tax contributions, tax-free growth, and tax-free withdrawals (provided certain conditions are met).

Roth IRAs are a fantastic financial opportunity that I explore with every client. Here are some more advantages:

• There’s no age limit on making Roth IRA contributions.

• Participation in your employer’s qualified retirement plan, like a 401(k), doesn’t affect your eligibility to contribute to a Roth IRA.

• You have a generous window to contribute to your Roth IRA for a specific tax year. Contributions can be made any time between January 1st of that year and the tax filing deadline of the following year.

• Required Minimum Distributions, or RMDs, are the minimum amounts you must withdraw from certain retirement accounts each year after you reach a certain age — or you’ll face steep IRS penalties. RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most workplace retirement plans like pre-tax 401(k)s. However, Roth IRAs are a special case. Roth IRAs do not have RMDs, offering greater withdrawal flexibility and allowing your money to grow for longer, if you’d like.

• The tax code sets limits on how much you can stash away in retirement accounts like Roth IRAs, but these limits are adjusted annually to account for inflation.

With all these benefits, why doesn’t everyone contribute to a Roth IRA?

There is a catch! At a certain income level, the amount you can contribute gets reduced, and when you reach a higher income level, you become altogether ineligible to contribute to a Roth IRA. To help navigate these rules, check out our "Can I Contribute To My Roth IRA?" flowchart:

“Can I Contribute to My Roth IRA?” (click for downloadable PDF)

Our flowchart simplifies key factors that affect eligibility, including:

• Earned Income: You must have earned income to contribute to a Roth IRA.

• Traditional IRA Contributions: Existing contributions to a traditional IRA may affect your eligibility.

• Modified Adjusted Gross Income (MAGI) Limits: Learn about the income thresholds based on your filing status, which determine eligibility for Roth IRA contributions.

Use our flowchart to navigate these points and see if contributing to a Roth IRA might be right for you.

Do you earn too much to contribute to a Roth IRA? Stay tuned for our next post “Can You Make a Backdoor Roth IRA Contribution?”, which highlights another strategy to grow Roth IRA dollars. A backdoor Roth IRA lets you bypass income limits completely, but there are important things to know before diving in.

Have questions? Want to learn more about whether a Roth IRA is appropriate for you? Schedule a free phone consultation.