Roth IRA Rules 2021: A Comprehensive Guide

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Updated on Thursday, December 10, 2020

Knowing all the Roth IRA rules is a key competency for anyone saving for retirement. The first thing to understand is that you fund your Roth IRA with money on which you’ve already paid income taxes. That means you pay no income taxes on withdrawals.

“Every dollar you take out of a 401(k) is not a true dollar — you’re going to have a tax liability,” said Rob Greenman, a financial planner in Portland, Ore. “The idea of having some assets that are growing tax-free, and being able to withdraw the amount in retirement and keep every nickel, that’s pretty cool.”

Other big benefits of a Roth IRA include the absence of any requirement to start taking required minimum distributions at age 70 ½, as with other types of retirement accounts. You can leave money in your Roth and pass it on to your heirs or your favorite charity, if you so choose. Plus, you can withdraw contributions at any time, period, without paying any penalties — that’s a big advantage over many other forms of retirement account. (To withdraw earnings without penalty, however, you’ll need to wait until you turn 59 ½, and the account must have been open for at least five years).

Read on for a full brief of all the Roth IRA rules — we’ve got you covered.

Who can open a Roth?

Among the basic Roth IRA rules is that you must have earned income. Anyone can open a Roth so long as they have reported income to the IRS below certain income thresholds (more on that in a sec). A teenager with a part-time job could open a Roth IRA, but a kid earning cash in the summer mowing lawns can’t open a Roth (unless they claim it as income — but what kid does that?).

“It can’t be, ‘My mom paid me to babysit,’” Greenman said. In general as long as you’re working and have either W2 or 1099 income, you can put money into a Roth.

Non-working spouses or spouses with very low wages can also open a spousal Roth IRA. You must be married and filing a joint tax return to make this possible.

How much can you contribute to a Roth IRA?

In 2021, investors can contribute up to $6,000 to a Roth IRA, or up to $7,000 if they’re 50 or older. How much you can save in a Roth also depends on your income — and above certain thresholds, you’re not eligible to contribute at all:

Roth IRA Contribution Guidelines
Tax Filing StatusModified Adjusted Gross Income (MAGI)Contribution Limit
Single < $125,000$6,000 ($7,000 if 50 or older)
≥ $125,000 but < $140,000Partial contribution*
≥ $140,000Not eligible
Married filing jointly< $198,000$6,000 ($7,000 if 50 or older)
≥ $198,000 but < $208,000Partial contribution*
≥ $208,000Not eligible
Married filing separately< $10,000Partial contribution*
≥ $10,000Not eligible
*If you fall into a partial contribution category, use Fidelity’s calculator to determine how much you can save.

There are a few other Roth IRA rules to understand when it comes to contributions:

  • The max applies to all IRA contributions. Although you can contribute to a traditional IRA and a Roth IRA in the same year, your total savings over both accounts cannot exceed $6,000 (or $7,000 if you’re 50 or older).
  • 401(k) contributions are a separate bucket. If you have an employer-sponsored retirement plan, such as a 401(k) or 403(b), your can contribute the maximum allowed to it and a Roth IRA.
  • Anyone can open a Roth IRA. As long as you have earned income, you can contribute to an IRA, whether you’re 75 or 15. (Generally, parents take the lead on opening a Roth for their child.)

You can open a Roth IRA at any broker or robo-advisor that offers the account, such as Vanguard, Schwab, Fidelity, Wealthfront or Ally. Look for a company that provides access to the investments you want, and pay attention to the costs involved.

“You should focus on fees, because those fees eat into the returns that markets provide,” Greenman said, advising that whichever company you work with, there are some questions you should make sure to ask: “What are the available investment options, what are they going to charge to buy or sell investments, and what are the underlying expenses of the investments you’re buying?”

When can I withdraw money from a Roth IRA?

Generally, a Roth IRA works like any other retirement account — you can start withdrawing money at 59 ½. But there are some other things to know. For instance, you can withdraw your contributions from your Roth IRA at any point, no matter how old you are, and you won’t owe taxes or pay a penalty. There are different Roth IRA rules for the earnings, however. Here’s how it breaks down:

You’re under age 59 and a half

If you withdraw earnings — rather than contributions — from your Roth IRA before age 59 ½, you may owe taxes and penalties. However, you might only owe taxes but no penalties in the following situations:

  • The funds are being used to buy your first home (up to a $10,000 lifetime max)
  • You’re paying for qualified education expenses
  • An injury leads to total and permanent disability, or death of the account holder
  • The money is being used to pay for health insurance if you’re unemployed
  • You are paying for unreimbursed medical expenses that are more than a certain percentage of your adjusted gross income
  • The distribution is made as part of a series of substantially equal periodic payments
  • The money is a qualified reservist distribution

You’re age 59 ½ or older

You can withdraw contributions at any point without paying any taxes or penalties. However, if you withdraw earnings, you’ll owe taxes if the account is less than five years old.

What if I make too much money to contribute to a Roth?

If your income is too high, making you ineligible to open a Roth IRA, there’s still a way in. It’s called a backdoor Roth IRA.

A backdoor Roth involves putting money into a traditional IRA account, and then converting the account to a Roth IRA. If you haven’t paid taxes on the money yet, you’ll need to do that as the conversion is considered income in the year it takes place. If you have other IRA accounts and they aren’t all pre-tax — you’ve paid taxes on some money, but not on all of it — it may be worth consulting a financial professional, as the tax calculation can get complicated.

In any given year, you can convert as much of your traditional IRA to a Roth IRA as you want, as long as you’re prepared to pay the tax bill. In other words, you’re not limited to $6,000 if your balance is higher than that.

It’s also worth noting that there are different withdrawal rules for money that’s been converted to a Roth. All converted money — both contributions and earnings — must be in the account for five years before you withdraw it, or you’ll pay a 10% penalty; in addition, note that the clock starts on Jan. 1 of the year in which you convert.

When do I have to start taking distributions?

With traditional IRAs, you’re required to start withdrawing a minimum amount from the account each year starting at age 72. However, if you own a Roth IRA, there is no required minimum distribution age.

“You can just leave it there for your great grandkids,” said Jon Ten Haagen, a financial planner in Huntington, NY. “You don’t ever have to take it out.”

This is a nice thing on two levels. First, it gives you more control in terms of your tax situation, so if you’re not looking to draw down income in a given year, you don’t have to take any funds out of your Roth. Second, it’s a great way to earmark funds for an inheritance.

“Not only are you going to be giving money away, but you’re going to be paying the tax up front,” Greenman said. Your heirs can even inherit the money and leave it invested — they’ll have to start taking distributions, but they can stretch the distributions over the course of their lifetime, allowing the balance to continue its tax-free growth. “It’s super powerful,” Greenman said.

The bottom line on Roth IRA rules

For eligible investors, a Roth IRA provides valuable savings diversification and flexibility. You can withdraw contributions at any point for any reason, and you can take out earnings tax-free for specific situations (first home, education). Earnings grow tax-free and can be withdrawn tax-free as long as you’re 59 ½ or older and the account is at least five years old — or you can leave the account for your grandchildren. If you have the ability, it’s a versatile tool to add to your portfolio.

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