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10 Facts About Roth IRAs Every Baby Boomer Should Know

By Matthew Frankel, CFP® - Updated Mar 8, 2017 at 8:05AM

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If you need to catch up on retirement saving, a Roth IRA can be a great way to do it.

Baby boomers are the group of Americans born between 1946 and 1964 (ages 53-71), which means this is the group that's reaching retirement age now and throughout the next decade or so. I've written before about how millions of boomers aren't well-prepared for retirement, but that an individual retirement account (IRA) can be a great way to catch up.

Roth IRAs in particular can be an appealing option for baby boomers (If you're a new investor, here's a discussion of what an IRA is). Here are some of the reasons why, as well as some other things boomers should know about this type of retirement savings account.

Envelope of $100 bills labeled "Roth IRA."

Image source: Getty Images.

1. Roth withdrawals are completely tax-free

As long as you are over 59 1/2 years old, your Roth IRA withdrawals are completely tax-free (and penalty-free). All IRAs are excluded from capital gains and dividend taxes on investments, and with a Roth IRA, you already paid income tax on the money you contributed. Therefore, unlike a traditional IRA, your Roth withdrawals will not come with a tax bill from the IRS.

2. And they won't count toward your taxable income

This is similar to the first point, but it's also worth pointing out that, no matter how much money you withdraw from your Roth IRA, it won't drive up your taxable income. This can have major implications for seniors, as the lack of other taxable income can make Social Security benefits tax-free as well.

3. You can use some of your Roth IRA savings early if you need

If you're not 59 1/2 yet, that doesn't mean your account is off-limits. There are a few reasons you can use your IRA early -- such as for a first-time home purchase or college expenses. And with a Roth IRA, you can withdraw any of your original contributions (but not investment gains) at any time, and for any reason.

4. You don't have to take your money out at all

Unlike 401(k)s, traditional IRAs, and other pre-tax retirement accounts, Roth IRAs are not subject to required minimum distribution rules. Unlike these accounts, which require that the owner begin taking money out starting at age 70 1/2, the Roth IRA has no such requirement. You can leave your money alone to grow for as long as you'd like. In fact, this feature has made Roth IRAs a popular estate-planning tool.

5. Still saving? You can contribute an extra $1,000 per year

If you're still making contributions to your Roth IRA and are considered a baby boomer, you are allowed to contribute an additional $1,000 per year on top of the current $5,500 annual limit, for a total of $6,500. The IRS allows this catch-up contribution amount for savers 50 and older in order to help them, well, catch up.

6. You need to leave your earnings alone for five years

I already mentioned that Roth contributions can be withdrawn at any time, and for any reason. However, to avoid the 10% early withdrawal penalty from the IRS, any investment profits can only be withdrawn after the account has been open for five years, in addition to the other withdrawal rules, such as reaching age 59 1/2. The clock starts on the first day of the tax year your first contribution was designated for. So, if you contributed to a Roth IRA in November 2011 for the 2011 tax year, the earliest you can withdraw investment gains would be Jan. 1, 2016.

7. Roth contributions are not tax-deductible, but may qualify for another big tax break

As you probably know by now, Roth IRA contributions are not tax-deductible. However, there's another tax break they can qualify for, known as the Retirement Savings Contributions Credit, or simply the Saver's Credit. To qualify, your income must be less than $62,000 for 2017 if you're married filing a joint return, or less than $31,000 if you're single, and the credit could put as much as $1,000 of your Roth contributions back in your pocket. And there's no upper age limit to this credit for Roth savers -- if you work part-time in retirement and decide to set some of your income aside in a Roth IRA, you can get the credit.

8. You can contribute, no matter how old you get

The ability to contribute to a traditional IRA stops at 70 1/2, the same age when required minimum distributions kick in. With a Roth IRA, you are allowed to contribute to your account for as long as you have earned income, which generally means wages from a job or income from a business you own. If you earn money, you can contribute it to a Roth IRA, even if you're 100 years old.

9. Contributions are restricted by income

However, to be able to contribute directly to a Roth IRA, your adjusted gross income (AGI) must be below a certain threshold. For single filers and married couples filing jointly, the AGI limits for a full Roth contribution are $118,000 and $186,000, respectively. Taxpayers with AGI up to $133,000 (single) or $196,000 (married) can make a partial contribution. However, there is a "backdoor" way of contributing if you earn too much, which essentially consists of contributing to a traditional IRA and immediately converting it to a Roth.

10. You can convert an existing traditional IRA or old 401(k) to a Roth IRA

Speaking of conversions, you can convert an old traditional IRA or employer-sponsored plan, such as a 401(k), to a Roth IRA, if you'd like. The biggest caveat is that you'll need to pay income tax on the amount of the conversion, assuming that you received a tax benefit when you initially made the contributions to the other account. Here's a guide that can help explain how a Roth conversion works.

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