If you don’t want to run afoul of the IRS when setting up, funding and withdrawing money from an IRA, you’ve got to play by the rules. Roth IRA rules are similar to those that apply to traditional IRAs, but there are key differences in a few areas.
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Roth IRA withdrawal rules
One of the biggest differences between Roth and traditional IRAs is how withdrawals from the account are treated. There are two main things to remember:
- You can withdraw the money you contributed to a Roth at any time and for any reason without paying taxes or penalties. That’s because you already paid taxes on the money you used to fund the account.
- Different rules apply to taking out investment earnings. This is where things start to get more complicated in order to get around paying any penalties and taxes.
To avoid taxes and a 10% early withdrawal penalty on earnings, the account must be open for five years or more — the clock starts on Jan. 1 of the year you make your first contribution — and must meet at least one of the following conditions:
- You are age 59½ or older
- You’ve become disabled, or you’ve died and money is being withdrawn by your estate or account beneficiary
- The withdrawal (up to $10,000 lifetime maximum) is for a first-time home purchase
There are a few situations when the IRS will let you withdraw earnings early from a Roth IRA and not hit you with an early withdrawal penalty.
There are also a few situations when the IRS will let you withdraw earnings early from a Roth IRA and not hit you up for the 10% penalty — even if you haven’t had the account open for five years. (You’ll still be on the hook for income taxes if the account has been open for less than five years):
- You’re age 59½ or older
- The withdrawal is due to disability
- The withdrawal is made by a beneficiary or your estate after your death
- The money is for a first-time home purchase (up to $10,000 lifetime maximum), certain medical expenses or qualified education expenses
- Due to a financial hardship, you decide to start taking substantially equal periodic payments (aka SEPP, a somewhat complex program described in this IRS FAQ), which requires committing to taking distributions for a certain period of time to avoid paying penalties.
Another withdrawal rule that’s also worth noting: You’re not required to start withdrawing money from your Roth when you retire. Traditional IRAs, on the other hand, are subject to required minimum distributions when the owner reaches age 70½. (Here’s more about traditional IRA withdrawal rules.)
The lack of required withdrawals means those who don’t want or need to start dipping into their Roth IRA funds can leave the money in the account for as long as they live and pass all of the dough along to their heirs.
Inherited Roths, however, do generally require beneficiaries to take minimum distributions if the beneficiary is not a spouse of the deceased. See our post on Roth IRA RMDs if this applies to you.
Roth IRA contribution rules
Contributions to a Roth IRA are based on how much money you make (specifically, your modified adjusted gross income, or MAGI) and your tax filing status (translation: whether you file your taxes jointly with someone else or not).
Here’s how the IRS determines whether you can or can’t fund a Roth and to what degree:
Roth IRA contribution guidelines for 2018
|Filing status||MAGI restrictions|
Other rules related to eligibility and contributions:
- You can contribute to a Roth and a traditional IRA in the same year. Just make sure the combined contribution amount does not exceed $5,500 ($6,500 if you’re 50 or older).
- You can also contribute to a Roth IRA and a 401(k) in the same year. The IRS is A-OK with you saving money in both an employer-sponsored retirement plan — a 401(k) or 403(b) — and an IRA in the same year, up to the maximum for each type of plan.
- You are allowed to make contributions to your Roth IRA past your retirement age. We point this out because with a traditional IRA the IRS does not allow any additional money to be added to the account once you reach the year you turn age 70½. If you’re earning income in your dotage, contribute away.
- There’s a workaround if you’re not eligible for a Roth. It involves rolling money into a Roth, a process that deserves an entirely separate article — like this one on how to set up a backdoor Roth IRA.
Note: There is no minimum required amount for opening a Roth IRA, and no rules about how much money you must put in a Roth IRA. But some brokerages may have their own required minimums.
» Ready to start? Here’s how and where to open an IRA.
Roth IRA tax rules
There are two key things to know about the tax treatment of Roth IRA dollars:
- Contributions to a Roth IRA are not tax-deductible. This differs from a traditional IRA, where contributions may be deductible from your taxes in the year you make them.
- But investments in a Roth IRA grow tax-free. That means you owe nothing in taxes on earnings when the money’s in the account — or even when you withdraw it in retirement.
To be clear, investors also pay no taxes on earnings growth in a traditional IRA — so long as those funds stay in the account. But unlike a Roth, you will eventually pay taxes on the earnings growth in a traditional IRA when the money is withdrawn.
A previous version of this article misstated the rules for withdrawing from a Roth IRA without taxes and penalties. This article has been corrected.