Roth IRA Rules and Comparison

Since its creation in 1997, the Roth IRA has become a popular retirement solution for many investors. This popularity is largely due to the account’s unique advantages. While the Roth IRA isn’t the only way to plan for retirement, knowing its benefits can help you determine what kind of role the account can play in helping you prepare for your future.

The first and foremost benefit of a Roth IRA is the account’s tax structure. A Roth IRA requires that contributions to the account occur with funds that have already had taxes taken out of them. This structure differs from a Traditional IRA gets funded with contributions be made with pre-tax funds. While you do have to pay taxes on funds that enter the account, any gains or earnings made by the funds in your Roth IRA are allowed to grow tax-free. Qualified distributions, funds withdrawn from the account after age 59.5 and after the account has been open for at least 5 years, are also tax-free.

Like a Traditional IRA, a Roth IRA can be funded through a contribution, transfer, or rollover. Unlike a Traditional IRA, the contributions made to a Roth IRA can be withdrawn at any time without penalties or taxes. These contributions are currently limited to $5,500 annually for individuals under age 50 and $6,500 annually for individuals over age 50. Income limits also apply to Roth IRAs. In order to be eligible to contribute to a Roth IRA, you must have earned income at least equal to the dollar amount contributed to the account. Individuals or married couples whose Modified Adjusted Gross Income exceeds certain IRS limits are also ineligible to contribute to a Roth IRA.

Roth IRA can also be funded in a fourth way, through a Roth conversion. This process involves taking a non-Roth retirement account- Traditional IRA, SEP IRA, SIMPLE IRA, 401(k)- and converting it to a Roth IRA by paying income taxes on previously tax-free account contributions. Currently, there are no limits on the amount of funds that can be converted to a Roth IRA. While converting non-Roth funds can help you take advantage of the benefits of a Roth IRA, this process does start a five-year requirement for qualified distributions on the converted funds.

Beyond these benefits, the Roth IRA contains other advantages. Unlike non-Roth IRAs, you can continue to contribute to a Roth account after age 70.5. You are also not required to take a yearly minimum distribution from a Roth IRA after reaching age 70.5. Your Roth IRA can also help you purchase a home. The IRS allows a lifetime maximum of $10,000 that can be withdrawn tax and penalty free from the Roth account to purchase a principal residence for the account holder.

While the Roth IRA has many advantages, it is important to know how your current financial situation and retirement goals factor into the equation. Working with your financial team can help you determine how best to utilize a Roth IRA to realize your retirement dreams. For more information about Roth IRAs, feel free to send us an e-mail at or give us a call at 877-742-1270.