8.2.10.1.3. Roth IRAs
The primary difference between a Roth IRA and a traditional IRA is that individuals cannot deduct contributions to Roth IRAs from their taxes. In other words, contributions to a Roth IRA are made with after-tax dollars. Participants do not have to pay annual taxes on the earnings made in the account, and unlike traditional IRAs, contributions can be withdrawn tax-free. Earnings can be withdrawn tax-free beginning five years after the year for which the first contribution was made to the Roth IRA and if the taxpayer is 59 1/2 years or older. Earnings that do not meet these requirements will be subject to penalty and taxation. The following rules hold for Roth IRAs:
- • One cannot deduct contributions to a Roth IRA from income for tax purposes.
- • Contributions are limited to earned income.
- • Contributions made in 2022 are limited to $6,000 with a $1,000 catch-up for individuals aged 50 or over (additional $6,000 to a spousal Roth IRA for a non-working spouse). For 2023, the contribution limit is $7,000, plus an additional $7,000 for a non-working spouse, while the catch-up contribution remains at $1,000.
- • Contributions can be withdrawn tax-free without penalty at any time.
- • Participants with income exceeding certain levels may not be eligible to contribute to a Roth IRA. (Traditional IRAs and most other qualified retirement plans do not have restrictions on income levels.)
- • There are no minimum age requirements to set up a Roth IRA.
- • There are no maximum age requirements to set up a Roth IRA.
Individuals who are contributing to both a traditional and a Roth IRA cannot contribute more than $6,000 across both accounts, and receive favorable tax treatment on this amount.
A big advantage of Roth IRAs is that they are not subject to required minimum distributions during the life of the owner. And if the spouse is the sole beneficiary, the Roth IRA can be automatically rolled over to the