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.