A Roth Individual Retirement Account (Roth IRA) is a tax-advantaged savings account that is established and funded by an individual to accumulate retirement savings. A Roth IRA is generally funded through after-tax annual contributions and rollovers from other eligible retirement plans, such as 401(k) plans.
A Roth IRA is easy to establish and provides the account owner with flexibility and control over their contributions, investments, and distributions. Investment earnings generally grow tax-deferred and may be distributed tax-free.
Anyone who has earned income under certain limits can establish and contribute to a Roth IRA. Earned income is compensation you receive from working that includes wages, commissions, and self-employment income. You can have a Roth IRA even if you have a retirement plan with your current employer.
To establish a Roth IRA, you must sign a Roth IRA plan agreement with an IRA custodian. Banks, life insurance companies, mutual fund companies, brokerage firms and other financial institutions can act as an IRA custodian. The IRA custodian will provide you with a copy of the plan agreement and a disclosure statement that explains the Roth IRA rules.
You can establish a Roth IRA at any time. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the IRA and make the contribution.
You can make an annual contribution of up to $5,500 (for 2018) or 100% of compensation, whichever is less. If you are age 50 or older, you may make an additional catch-up contribution of $1,000. The annual contribution limit applies to all of your traditional and Roth IRAs in aggregate.
You are not required to make a Roth IRA contribution each year and you can vary the amount you choose to contribute each year.
Contributions to a Roth IRA are not tax-deductible. They are referred to as “after-tax” contributions.
You can transfer or rollover Roth IRA assets into another Roth IRA. If you are eligible to take a distribution from your employer’s retirement plan, you can roll over your designated Roth contributions from your employer’s plan to your Roth IRA. Additionally, you can roll over pre-tax assets in your employer’s plan to a Roth IRA. The pre-tax amounts you roll over must be included in your taxable income for the year of distribution from your employer’s plan. Traditional, SEP, and SIMPLE IRA assets may also be converted to a Roth IRA in a taxable transaction called a conversion.
You can take distributions from your Roth IRA at any time. The portion of the distribution that consists of contributions and rollover assets will be tax-free because you have already paid tax on those assets. If the distribution is made after you have had a Roth IRA for at least five years, and you have attained age 59½, died or become disabled, the earnings will also be distributed tax-free. If these conditions are not satisfied, any earnings included in the distribution will be taxable income in the year of the distribution. Earnings that are taxable may be subject to a 10% early distribution penalty if you are not yet age 59½.
Roth IRAs are not subject to the age 70½ required distribution rules that traditional IRAs must satisfy. Distributions are not required while you are alive but your beneficiaries will be required to take distributions after your death.