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Roth IRA Rules: What's New for 2014 and Beyond

If you want to save for retirement, using a Roth IRA can be the best decision you'll ever make. But you have to know all the Roth IRA rules to make the most of it. Here are the key Roth IRA rules, with updates to show you how they've changed in 2014.

Roth Rule 1: If you make too much money, you can't do a Roth.
The most important thing to know about the Roth is that the IRS doesn't allow some taxpayers to contribute to one at all. If you're considering a Roth for the 2013 tax year -- which you can still do until April 15, 2014 -- then you can't make more than $127,000 if you're a single filer or $188,000 if you're filing jointly, or else you won't be allowed to put any money into a Roth. Singles with income between $112,000 and $127,000 or joint filers with income between $178,000 and $188,000 can only contribute reduced amounts to a Roth.

If you're considering a Roth for the 2014 tax year, the Roth IRA rules for income limits above which contributions are completely prohibited are $129,000 for singles and $191,000 for joint filers. Beginning at $114,000 for singles and $181,000 for joint filers, you'll face reduced contribution limits.

Roth Rule 2: You can only contribute up to a certain amount to a Roth.
Roth contribution limits are indexed for inflation, but after rising in 2013, they're scheduled to stay the same in 2014. That means you can contribute up to $5,500 to a Roth IRA in 2013 and 2014, with those 50 or older entitled to an extra $1,000 catch-up contribution. Again, those limits apply to each tax year, so if you haven't contributed yet for 2013, you can still do so through mid-April.

Roth Rule 3: Distributions from your Roth IRA are tax-free -- usually.
The key benefit of the Roth IRA is that distributions are entirely tax-free, so long as you follow the rules. But those rules are complex, with different provisions covering your initial contribution versus the earnings from your Roth. Although penalties can apply to withdrawals before age 59 and a half or within the first five years you have your Roth, you can avoid them in certain circumstances, such as withdrawals for costs related to an IRS-recognized disability, first-time home costs, or higher-education expenses.

Roth Rule 4: Roths can last after you die -- if you're smart about naming beneficiaries.
Most people figure they'll use up all their savings before they die. But Roths offer an attractive feature in that they can let the heirs you name get tax-free treatment for an inherited Roth IRA. When you pick beneficiaries, keep in mind that if they want, they'll be able to take out money gradually, keeping the rest to grow tax-free throughout their lifetimes. That might make choosing a younger beneficiary for a Roth a smart move, as it lengthens the amount of time they can keep money in the inherited Roth.

Roth Rule 5: Want to convert your traditional IRA to a Roth? You can -- regardless of income.
One way to get around the income limits on Roth contributions is to convert a traditional IRA to a Roth. Before 2010, separate Roth-conversion income limits prevented some from doing Roth conversions. But since then, taxpayers at any income level can convert. You'll still have to include the amount of previously deductible contributions to the converted IRA as taxable income, but since Roth IRA income is tax-free, it might be worth paying tax now to save more later.

Find out why the Roth IRA rules!
Keeping up to date about Roth IRA rules will let you make the most of these great retirement tools and avoid the mistakes that many make with their retirement. For the absolute latest on Roth IRAs, this IRS website link will take you to all the detailed information you and your accountant will want to decide whether a Roth IRA is right for you.

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Read/Post Comments (24) | Recommend This Article (89)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2014, at 6:41 PM, mattmosa wrote:

    Dan sez

    "You'll still have to include the amount of previously deductible contributions to the converted IRA as taxable income, but since Roth IRA income is tax-free, it might be worth paying tax now to save more later"

    Question

    If a traditional IRA is converted to a Roth, do you pay tax on the entire worth of the traditional IRA or SEP IRA including gains, or do you pay tax only on the non-taxable contributions you've made to the traditional IRA?

    Example

    Sep contributions = 50k

    gains =50k

    total 100k

    In a conversion is the 50k taxable or the whole 100k taxable?

    Is there any age limit for making the conversion?

  • Report this Comment On February 07, 2014, at 7:48 PM, darrellquock wrote:

    I cashed in on a large amount of realized gains in 2013. Do these gains count against my income limits for the year?

  • Report this Comment On February 07, 2014, at 8:28 PM, MetallicaRocks wrote:

    If you never had a Traditional IRA before, the conversion is a sweet way to get your Roth funded tax free if you are above the income limits. I'm up to my third conversion. Filling out the tax forms is a bit cumbersome, but here is a primer for TurboTax showing how to do it one screen shot at a time:

    http://thefinancebuff.com/how-to-report-backdoor-roth-in-tur...

  • Report this Comment On February 07, 2014, at 8:29 PM, MetallicaRocks wrote:

    Rule 3: I believe you can withdraw funds from your Roth tax free before age 59 1/2 as long as the funds do not exceed the total principle placed in the Roth.

  • Report this Comment On February 08, 2014, at 12:24 AM, satcheluk wrote:

    A Roth can be an effective alternative to a 529 plan in some circumstances.

  • Report this Comment On February 08, 2014, at 8:01 AM, Demint wrote:

    It is possible to roll as well as fund a ROTH each year if your self employed. Check out the sep-Ira, it requires you to keep it for one year then you can roll it. a Sep-Ira will allow approx 25 percent of self employed income each year. watch your income levels then roll your sep as well as fund your personal Roth each year. doing this, you can fund your Roth up to 49k per year. now, if you creative, make that Roth self directed and do all your retirement investing tax-free. I use trustetc.

  • Report this Comment On February 08, 2014, at 8:07 AM, Demint wrote:

    Oh! And if your wife is an employee or housewife of you or you business you may also fund a ROTH for her as we'll.

  • Report this Comment On February 08, 2014, at 3:57 PM, brianpt wrote:

    Are the income limits based upon Adjusted Gross Income or Taxable Income?

  • Report this Comment On February 08, 2014, at 4:40 PM, IC1101 wrote:

    mattmosa: for your

    Sep contributions = 50k

    gains =50k

    total 100k

    After Conversion to Roth, the gains from SEP or any non-Roth IRA is taxable income for the year of conversion. The original contribution to non-Roth IRA is taxable upon conversion to Roth only if it was pre-tax deductible contribution. If it was after-tax non-deductible contribution (i.e. non-taxable base) then it does not get taxed when converted to Roth.

  • Report this Comment On February 09, 2014, at 11:11 AM, TMFGalagan wrote:

    @Mattmosa - In general, if you got a deduction for your contribution, it'll be taxable when you convert. Only if you made nondeductible contributions to an IRA will they not get counted - and there are complex rules if you don't convert all of your various IRAs.

    @MetallicaRocks - Yes, that's the point I was trying to make when I said "different provisions cover your initial contribution versus the earnings from your Roth." For the most part, you can usually withdraw your contributed amounts with no penalty - although the laws do get pretty complex.

    @darrellquock - Capital gains do count as gross income, yes.

    @brianpt - The limits are based on modified AGI, which is AGI after adding back in some deductions. Look here for more details: http://www.irs.gov/publications/p590/ch02.html#en_US_2013_pu...

    best,

    dan (TMF Galagan)

  • Report this Comment On February 10, 2014, at 3:56 PM, jvgfool wrote:

    Good article. This lays out the details in easy to read manner. Thanks.

  • Report this Comment On February 10, 2014, at 5:24 PM, bdmac9 wrote:

    Rule 4 states that beneficiaries can gradually withdrawal funds from an inherited Roth if they want to. It is not a choice. An inherited Roth is subject to RMD rules just like a inherited traditional IRA so they have to start withdrawing the first year after the death of the original owner or face a 50% penalty.

  • Report this Comment On February 10, 2014, at 5:44 PM, rsinsheimer wrote:

    Dan, you left out another very important Roth IRA benefit -- no required minimum distribution during the owner's lifetime. As compared to a conventional IRA where you *must* start taking money out at age 70-1/2.

    A non-spousal beneficiary of a Roth IRA will have to take required minimum distributions yearly in the year they turn age 61 (or within a year of receipt of the IRA at an age greater than 61), but those distributions will continue to be tax-free.

    -- Roger

  • Report this Comment On February 10, 2014, at 6:12 PM, robertfh1957 wrote:

    are the income limits you mentioned adjusted gross income or gross pay income?

  • Report this Comment On February 10, 2014, at 7:21 PM, mythshakr wrote:

    Something to think about with traditional to Roth conversions. If you use part of the traditional IRA distribution to pay the income taxes then that money is gone. There is no way to put that money back into either IRA later. However, if you can use funds from a taxable account to pay the taxes then the total amount distributed from the traditional IRA is convertible.

    Another benefit of the Roth IRA is that distributions do not count as income for Social Security taxability in retirement whereas traditional IRA distributions do.

  • Report this Comment On February 10, 2014, at 8:14 PM, samsdad wrote:

    Are the rules for converting a 457 to a Roth the same as a traditional IRA?

  • Report this Comment On February 10, 2014, at 10:27 PM, ETQ wrote:

    If the Federal government is so encouraging over IRA investment, why don't they raise the contribution limit? It's been on hold @ $5500. for some time.

  • Report this Comment On February 11, 2014, at 1:49 AM, lmagnee wrote:

    Do these same rules apply to a Roth 401K? My company offers a Roth 401K as one of the options. I am concerned these limits might apply to my Roth 401K as well.

  • Report this Comment On February 11, 2014, at 9:27 AM, WHOVPLLC wrote:

    Traditional IRA 15 April 1980. Will see CPA firm in a few weeks to do 2013 taxes. Daughter is an attorney with her own Firm established 2006.

    Will be 70 1/2 in 2016. May convert IRA to either a Roth or convert to a Charitable Trust in 2015.

    Formed a Venture Capital Limited partnership in 2012, will close Limited Partner funding December 2014 at one hundred million. Invest in start-up and early stage Biotechnology and Information Services industries. Former VC investor in Genentech, Amgen, Biogen and others.

    WHOVPLLC(R)

    Copyright 2014

  • Report this Comment On February 11, 2014, at 2:00 PM, Way wrote:

    I read that anyone with taxable earned income can make a contribution from his/her paycheck or savings that have been already been taxed.

    I have a 10 year old girl. What are some of the legal ways for her to get paid so she can fund a ROTH IRA? For example, can she help her dad’s business and get paid? What about my 3 year old girl? (This is a real question, not a joke.)

    Thanks...

  • Report this Comment On February 15, 2014, at 7:04 AM, Nanamimi wrote:

    When you sell an investment from your Ira in order to take a distribution do you have to pay capital gains on the increase in value? Or is that increase in growth tax free also?

  • Report this Comment On February 17, 2014, at 7:57 PM, Dougdstecklein wrote:

    @way

    I own a construction company and pay my 6 and 8 year old daughters to stuff estimate folders. They each make $500 a year which goes into the Roth IRA accounts I setup for them. Don't go crazy with how much you pay them or it could raise some red flags. Keep it realistic and honest. I wouldn't do it for a 3 year old though.

  • Report this Comment On March 22, 2014, at 7:14 PM, ArthurB wrote:

    What happens if you contribute monthly to your Roth IRA then near end of year you determine that you exceed the income limits such as making more than 188k for filing jointly? Do you need to withdraw your investment or do you put this on your tax return?

  • Report this Comment On May 07, 2014, at 5:28 PM, mdboze wrote:

    2 FOOL Articles conflict on Roth Conversion from Traditional IRA:

    One says you can convert your traditional IRA to a Roth regardless of income.

    The other says if your AGI is greater than $100,000, you may not convert from a traditional IRA to a Roth IRA.

    Referencing articles:

    "Roth Rule 5: Want to Roth IRA Rules: What's New for 2014 and Beyond"

    By Dan Caplinger |

    February 7, 2014

    Convert your traditional IRA to a Roth? You can -- regardless of income.

    One way to get around the income limits on Roth contributions is to convert a traditional IRA to a Roth. Before 2010, separate Roth-conversion income limits prevented some from doing Roth conversions. But since then, taxpayers at any income level can convert.

    Pasted from <http://www.fool.com/retirement/iras/2014/02/07/roth-ira-rule...

    2nd Srticle:

    "All About IRAs The Roth IRA Part II: Conversions"

    By Roy Lewis

    Conversion must be qualified:

    The law states that if your AGI is greater than $100,000, you may not convert from a traditional IRA to a Roth IRA.

    This $100,000 limitation applies not only to single filers, but also to married people filing jointly and head-of-household filers.

    Pasted from <http://www.fool.com/money/allaboutiras/allaboutiras05.htm&gt...

    Which one is correct?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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