Should I Open a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings plan that enables you to save for retirement on an after-tax basis. A Roth IRA, which can help to supplement the dollars you are accumulating in your employer-sponsored retirement plan, is different from a "traditional IRA" (sometimes referred to as simply an "IRA"). A traditional IRA is also a retirement savings plan, but it has different tax implications and participation guidelines.
To contribute to a Roth IRA, you—or your spouse, if you file your taxes jointly—must have earned income, such as wages, salaries, commissions, tips, bonuses, or income from self-employment. In addition, you must meet certain income and tax filing requirements. If you work, but your spouse is not employed, he or she may establish his or her own Roth IRA, subject to IRS guidelines.
Almost anyone can contribute to a Roth IRA. You are eligible to contribute to a Roth IRA any year you (or your spouse) receive earned income, subject to income limitations. For a single taxpayer, a full contribution is available for Adjusted Gross Income under $114,000 and is completely phased out at $129,000. For married couples filing jointly, the phase out range is $181,000 to $191,000. (2014 limits, indexed for inflation.) Since you fund a Roth IRA with after-tax dollars, meaning you've already paid taxes on the money you contribute, your contributions are not taxed upon withdrawal. And earnings grow tax-deferred, and potentially income tax-free.
You may convert or re-characterize assets from a traditional IRA or employer-sponsored qualified plan to a Roth IRA. If the assets you convert are before-tax contributions, they'll be subject to ordinary income tax the year in which you convert.
For more information on Roth conversions, refer to Roth IRA Conversions.
LIMITATIONS AND DEADLINES
The maximum amount you can contribute to a Roth IRA and traditional IRA in 2014 combined, is $5,500 or your taxable compensation for the year—whichever is less. You may contribute up to $6,500 if you are 50 or older by December 31 of that tax year.
You can open a Roth IRA and make a contribution for a tax year up until the due date (without extension) of the tax return for that year. Generally, this is the April 15th following the tax year. For example, you can make a Roth IRA contribution for 2014 from January 1, 2014 through April 15, 2015.
TAX TREATMENT & WITHDRAWALS
You pay taxes on the money that you contribute to a Roth IRA before you make your contributions. But you'll pay no federal taxes on your withdrawals (including investment earnings) if you meet certain requirements1. However, any withdrawals you make of conversion dollars within five years of conversion or of your account's investment earnings before reaching age 59½ may be subject to a 10% federal income tax penalty. (Your own contributions are not subject to this restriction; they may be withdrawn at any time, both tax- and penalty-free.) Unlike a traditional IRA, with a Roth IRA, there are no guidelines that require you to begin taking withdrawals within a certain time frame.
WHERE YOU CAN OPEN A ROTH IRA
You can set up a Roth IRA at many different financial institutions—such as banks, insurance companies and brokerage firms.
BEFORE YOU OPEN A ROTH IRA…
A Roth IRA can be an excellent way to supplement your workplace-sponsored retirement plan, but be sure you understand the IRS’s Roth IRA guidelines before you proceed. Since the information presented here is merely a summary of Roth IRA provisions, you may wish to consult a financial professional for assistance. If you prefer, a Prudential Retirement® Counselor can assist you. Simply call 1-877-PRU-2100 toll free, Monday through Friday, from 8 a.m. to 6 p.m., ET.
1 In order for distributions to be made from a Roth IRA free of penalties and federal income taxes, your Roth IRA must have been established at least five tax years before the withdrawal (period begins with the tax year for which your first contribution is made) and your distribution must be: a) made on or after the date you attain age 59½; b) made to your beneficiary or your estate after your death; c) attributable to your being disabled; or d) taken because you are a qualified first-time home-buyer (lifetime limit of $10,000).