What is a Roth IRA?

A Roth IRA offers you the poten­tial for tax-free dis­tri­b­u­tions at retire­ment. While you must have earned income to con­tribute to a Roth, and con­tri­bu­tions are not tax deductible, you won’t pay fed­er­al tax­es on div­i­dends or cap­i­tal gains you have earned if you have a qual­i­fied dis­tri­b­u­tion.

Roth IRA Benefits

A Roth IRA is an attrac­tive choice to many investors.

  • Tax-free Earn­ings - You can begin tak­ing tax-free and penal­ty-free with­drawals of Roth earn­ings at age 59 ½ if your account is at least five years old.
  • Save Tax­es on Invest­ment Income - A Roth IRA allows you to save tax­es on your invest­ments over the years by shel­ter­ing annu­al growth and invest­ment income.
  • Con­tri­bu­tion Oppor­tu­ni­ties - Con­tribute up to the max­i­mum of $5,500 per year. If you’re 50 or old­er, you can make an addi­tion­al $1,000 catch-up con­tri­bu­tion.
  • Spousal Con­tri­bu­tions - Depend­ing on your annu­al Adjust­ed Gross Income (AGI), you may make a nond­e­ductible con­tri­bu­tion of up to $5,500 to a Roth IRA for a non-work­ing spouse, sub­ject to joint-fil­er tax and earned income lim­its.
  • Ear­ly With­draw­al Option - You may take non­tax­able with­drawals before age 59½ if the Roth IRA is held for at least five years and you meet cer­tain dis­tri­b­u­tion guide­lines. Oth­er­wise, an ear­ly with­draw­al before age 59 ½ may be sub­ject to tax­es and a 10 per­cent penal­ty.

Roth IRA Contribution Limits

Year Fil­ing Sta­tus Roth IRA Adjust­ed Gross Income Lim­its
2015 Sin­gle fil­er $116,000-$131,000
Joint fil­ers $183,000-$193,000
Mar­ried fil­ing sin­gle $10,000

Traditional vs Roth IRA

Fea­ture Tra­di­tion­al IRA Roth IRA
Con­tri­bu­tion Lim­its 100 per­cent of earned income. Up to:
  • $5,500 – sin­gle fil­ers
  • $11,000 – joint fil­ers
100 per­cent of earned income. Up to:
  • $5,500 – sin­gle fil­ers.
  • $11,000 – joint fil­ers.
Catch-up Con­tri­bu­tion Pro­vi­sion Up to $1,000 for indi­vid­u­als age 50 and over. Up to $1,000 for indi­vid­u­als age 50 and over.
Eli­gi­bil­i­ty Under age 70½ and employed Any age when sin­gle and joint tax fil­ers fall under cer­tain AGI lim­its.
Deductibil­i­ty Ful­ly deductible if not an active par­tic­i­pant in a qual­i­fied retire­ment plan (cer­tain AGI lim­its may apply to joint fil­ers). Reduc­ing deduc­tion avail­able for active par­tic­i­pants in qual­i­fied retire­ment. Nond­e­ductible.
Dis­tri­b­u­tions
  • Before age 59½. Taxed as ordi­nary income. Ten per­cent penal­ty does not apply if used for cer­tain dis­tri­b­u­tions, such as: death, per­ma­nent dis­abil­i­ty, qual­i­fied high­er edu­ca­tion expens­es or a qual­i­fied first-home pur­chase.*
  • After age 59½. Deductible con­tri­bu­tions – and any earn­ings – taxed as ordi­nary income.
  • Must begin tak­ing required min­i­mum dis­tri­b­u­tions at age 70½.
  • Before age 59½. Tax free if Roth IRA held at least five years and dis­tri­b­u­tion is due to: death, per­ma­nent dis­abil­i­ty, qual­i­fied edu­ca­tion or a qual­i­fied first- home pur­chase.
  • Any tax­able (non-qual­i­fied) dis­tri­b­u­tions: Taxed as ordi­nary income, but 10 per­cent penal­ty does not apply if used for cer­tain dis­tri­b­u­tions, such as qual­i­fied high­er-edu­ca­tion expens­es or qual­i­fied first-home pur­chase.
  • After age 59½. Tax free if Roth IRA held at least five years.
  • Required min­i­mum dis­tri­b­u­tions are not required at age 70½

* A non­qual­i­fied ear­ly with­draw­al before age 59 ½ may be sub­ject­ed to tax and a 10 per­cent penal­ty as set by fed­er­al law.