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Retirement Planning
Roth IRA Rules and Limits
Roth IRA contribution limits, income phaseouts, the 5-year rule, withdrawal ordering, and penalty-free exceptions, what savers should know before contributing.
Roth IRA Rules and Limits
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What Is a Roth IRA?
- A retirement account funded with after-tax dollars, qualified withdrawals are tax-free
- Unlike traditional IRAs, Roth IRAs have no required minimum distributions for the owner
- Especially popular among those who expect higher tax rates in retirement
- Decades of tax-free compounding can produce significant wealth at retirement
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Full Guide
What Is a Roth IRA?
- A retirement account funded with after-tax dollars, qualified withdrawals are tax-free
- Unlike traditional IRAs, Roth IRAs have no required minimum distributions for the owner
- Especially popular among those who expect higher tax rates in retirement
- Decades of tax-free compounding can produce significant wealth at retirement
Contribution Limits and Income Phaseouts
- Annual limit: $7,000 in 2025 for those under 50; $8,000 with the age-50 catch-up
- The limit applies across all traditional and Roth IRAs combined, not per account
- 2025 single phaseout: $150,000-$165,000 MAGI; MFJ: $236,000-$246,000
- Contributions must come from earned income, investment income alone does not qualify
The 5-Year Rule for Earnings
- Earnings are tax-free only if the account has been open for at least 5 tax years
- The clock starts January 1 of the year you make your first Roth IRA contribution
- A separate 5-year clock applies to each Roth conversion for penalty-free access before 59 1/2
- Contributions (not earnings) can always be withdrawn tax- and penalty-free at any time
Withdrawal Ordering Rules
- Withdrawals follow a specific order: contributions first, then conversions, then earnings
- Contributions come out first, always tax-free and penalty-free regardless of age
- Converted amounts come out next, tax-free but may face 10% penalty if under 59 1/2
- Earnings come out last, tax-free only if age 59 1/2+ and the 5-year rule is met
Penalty-Free Exceptions
- First-time home purchase: up to $10,000 of earnings can be withdrawn penalty-free
- Disability or death: full distribution avoids the 10% penalty
- Substantially equal periodic payments (72(t)/SEPP) provide penalty-free access before 59 1/2
- Other exceptions include unreimbursed medical expenses and qualified education costs
Roth IRA vs Roth 401(k)
- Roth 401(k)s have no income limits, anyone with plan access can contribute
- Roth 401(k) limits are much higher: $23,500 in 2025 vs $7,000 for Roth IRA
- SECURE 2.0 eliminated RMDs for Roth 401(k)s starting in 2024
- Roth IRAs generally offer more investment choices and greater withdrawal flexibility
Beneficiary Rules and Estate Planning
- Spousal beneficiaries can treat an inherited Roth IRA as their own and delay distributions
- Non-spouse beneficiaries must generally empty the account within 10 years (SECURE Act)
- Inherited Roth IRAs are income-tax-free if the 5-year rule was met by the original owner
- Roth IRAs can be a powerful wealth-transfer tool since heirs receive tax-free distributions
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