Are Roth IRA worth It 

What is Roth IRA

A Roth IRA (Individual Retirement Account) is a retirement plan where savers (individuals) contribute after-tax dollars (not allowed as a deduction in the current year of contribution) and the contributions are allowed to grow tax-free, and qualified distributions are tax-free (you must have held the account for at least 5 years and aged 59½ years or older).

Roth plan is ideal for individuals who are likely to be in higher marginal tax brackets in the future, or who want to avoid uncertainties in future tax changes hence locking their savings in the current tax rate (future withdrawals locked at the current rate). Roth IRA has income limitations (Modified Adjusted Income limits) so not very suitable for old savers. In short, your Eligibility to contribute to this plan is determined by income and tax filing status.

Below is a quick summary of Roth IRA:

Access of contributions

The original after-tax contribution can be accessed at any time, within any age limit, and without penalties or taxes. Penalties and taxes may accrue only if you access what the fund has grown to (gains).

Age restrictions

There is no minimum age cap on opening a Roth IRA, You can contribute even after retirement as long as you have qualified income (earnings from work.). You are allowed to make contributions to Roth IRA beyond the age of 70 ½ years.

Required Minimum Distributions (RMDs)

Contrary to traditional IRAs, Roth IRAs are not subject to RMDs after 72 years. You are allowed to leave your contributions in Roth IRA as long as you live. The plan is Ideal if you want to avoid RMD’s-IRS doesn’t dictate any mandatory withdrawals. Your savings will continue to grow even after your retirement and can be passed to your heir tax-free (handy for estate planning).

Designated Roth Accounts

The account was originally designated as a Roth Plan i.e. the Roth IRA account is established with an institution that has been approved by IRS to offer IRAs.

Roth IRA contribution max | Roth IRA annual limit

How much Roth IRA can I contribute

 Roth IRA 2022 limit

Roth plan contributions are based on current earned income. You may contribute simultaneously to both a Traditional IRA and Roth IRA, despite being covered by an employer-sponsored plan. The most you can contribute in 2022 to both traditional and Roth IRAs is the smaller of:

• $6,000 in you are aged 50 years and below; or
• $7,000(catch up of $1,000) if aged 50 years or older by the end of that year; or
• Taxable compensation for the year (can only contribute a maximum of what you earn)

Roth IRA limits 2021

The most you can contribute to both traditional and Roth IRAs is the same as 2022 and is the smaller of:

• $6,000 in you are aged 50 years and below; or
• $7,000 if you are aged 50 years or older by the end of that year; or
• Taxable compensation for the year (can only contribute a maximum of what you earn)

Contribution to Roth IRA income limits | Roth IRA max income | Roth IRA salary limits

 Roth IRA contribution income limits 2022

Your eligibility for a Roth plan is tied to your modified adjusted gross income (MAGI). For you to qualify to contribute the maximum amounts in the tax year 2022, your MAGI must be as follows;

• Less than $129,000($125,000 in 2021) if single; or
• Less than $204,000($198,000 in 2021) if married and filing jointly; or
• Zero (Zero in 2021) if married Filing Separately (lived spouse at any time during the year).

IRS allows savings to Roth plan on a reduced basis as your MAGI exceeds the threshold to contribute maximum amounts. This Phase-out limits higher earners’ ability to contribute to a Roth. This will continue to the point where you are not allowed to make any contributions at all. You are not eligible to make any contribution if your income is above the limits below;

• 144,000($140,000 in 2021)) if a single filer; or
• $214,000($208,000 in 2021) if married filing jointly; or
• $10,000 and over ($10,000 and over in 2021) If Married Filing Separately (lived spouse at any time during the year)

Roth IRA limits 2021 income

IRS allows you to make the full contribution in the tax year 2021 if your MAGI is;

• Less than $125,000($124,000 in 2020) if single; or
• Less than $198,000($196,000 in 2020) if married and filing jointly; or
• Zero (Zero in 2020) if married filing separately (lived spouse at any time during the year).

You are not eligible to make any contribution if your MAGI is above the limits below;

• $140,000($139,000 in 2020)) if a single filer; or
• $208,000($206,000 in 2020) if married and filing jointly; or
• $10,000 and over ($10,000 and over in 2020) if married filing Separately (lived with spouse at any time during the year)

Roth IRA early withdrawal penalty

There is no penalty or tax on the withdrawal of your original contributions. These savings can be accessed tax-free and at any time. However, Penalties will be charged on the Roth plan earnings if the age limit of 59½ and the five-year holding period rule are not observed.

Penalties can be avoided (but not taxes) if the savings are accessed under the following conditions:

• First-time home purchase (limited to $10,000 in one’s lifetime).
• Qualified education expenses(Higher education)
• Qualified expenses related to a birth or adoption
• Death or permanent disability.
• Medical expenses (not reimbursable) or health insurance if not unemployed.
• Distributions are to be made in substantially equal periodic payments.
• Involuntary distribution for payment of IRS taxes
• Reservist distributions

A “nontaxable rollover” to another IRA is allowed within all the age bands without attracting any taxes or penalties. This must be effected within 60 days of receiving the check and only allowed once within a 12-month period.

Roth IRA Retirement Age

IRS may charge a withdrawal penalty of 10% on your Roth plan earnings if your account is accessed before you reach 59½ years old, and the account has not achieved the minimum stated period of five years.

Should you access your Roth IRA after age 59½ years, but not before the five-year holding period rule, your earnings will only be subject to taxes but not penalties.

How Roth IRA is taxed

Roth IRA Qualified Distributions

Roth IRA Qualified Distributions are not taxable (since earnings are tax-free rather than tax-deferred). Distributions are deemed qualified if they meet any of the conditions below;

• Five-year holding period-Withdrawal is made after five years after the first tax year of making a Roth IRA contribution (including earnings) or;
• Age Limit-You have attained the minimum age of 59½ or
• Qualify for Exceptions to the early withdrawal penalty-i.e. death or permanent disability, first-time home purchase or you use the withdrawal, etc.

 Tax on Excess Roth IRA Contribution

6% tax per year is charged on any excess amounts that remain in the Roth plan. The tax is maxed at 6% of the combined value of all IRAs at the end of that tax year. However, you can avoid the tax by:

• Withdrawing the excess contributions by the due date of your individual income tax return (including extensions); and
• Taking out any income earned on the excess contribution.

You are not allowed to contribute to a Roth plan if your income exceeds the set limits. However, should your income dip to accepted limits in subsequent years, you can resume your Roth IRA contributions.

Income Tax on Inherited Roth IRA accounts

Under Roth IRA, contributions are made from after-tax dollars i.e. income taxes have already been paid upfront on any contributions, or already paid when you converted to Roth IRA. Distributions to your heirs will not incur any further income tax.

Deadlines for Roth IRA Contribution

Deadlines for contributions to a Roth IRA for the current tax year are typically set on April 15 of the following tax year. Don’t wait for the last-minute rush as it disadvantages you by limiting the tax-free growth potential period.

Bottom line

The direct Roth plan contribution hasn’t changed for the tax year 2022, but the income limits for contributing to these accounts have gone up.

IRS allows contributions to an Individual Retirement Account (IRA) on behalf of your unemployed non-working spouse that you file jointly with. However, your total combined contribution cannot exceed your joint taxable income or twice the annual IRA limit (whichever is less).

IRS allows Minors to contribute to an IRA. However, this is based on their own earned income limits rather than that of the parents.