3 Roth IRA Rules You Should Know by Heart

There's a reason Roth IRAs are gaining popularity these days. Not only do Roth accounts allow your money to grow tax-free, but once the time comes to take withdrawals in retirement, you get your money free and clear of taxes as well. Here are three more essential Roth IRA rules that can help you decide how you ought to be saving money for the future.

1. There are income limits that dictate your eligibility to contribute to a Roth

In an ideal world, you'd be allowed to contribute as much of your salary as desired to a Roth IRA. In practice, though, your annual contributions are capped at $5,500 if you're under 50, or $6,500 if you're 50 or older. Furthermore, your eligibility to fund a Roth in the first place will depend on your income level. Unfortunately, higher earners don't get the option to contribute to Roth accounts directly.

The following table outlines the current annual Roth IRA income limits depending on your tax filing status:

DATA SOURCE: IRS.

Now keep in mind that even if you're not able to contribute to a Roth directly, you do have the option to fund a traditional IRA and then convert that sum to a Roth down the line. Though you'll have to pay taxes on whatever amount you move over, you'll get to enjoy the numerous benefits Roth IRAs offer.

IMAGE SOURCE: GETTY IMAGES.

2. You can withdraw your principal contributions at any time without penalty

When you fund a traditional IRA, you get to deduct the amount you contribute from that year's tax return. As such, you're required to keep that money locked away until retirement, and so you'll face a 10% early withdrawal penalty if you access that money prior to age 59-1/2, unless you happen to qualify for an exception.

Roth IRAs, however, work differently. Since there's no immediate tax break for funding a Roth (but rather, you get tax-free distributions in retirement), you're allowed to withdraw your principal contributions at any time, and for any reason, without penalty. You may, however, get penalized for accessing the earnings portion of your account too soon.

Here's an example. Say you contribute $5,000 to your Roth and need that money two years later, at which point your balance has grown to $5,200. If you remove the initial $5,000 you put in and nothing else, that money is yours to take penalty-free, but you'll face a penalty if you touch that additional $200 of earnings.

3. You'll never be forced to take distributions

If you open a traditional IRA, you can't just let that money sit and grow indefinitely. Rather, you'll be required to start taking withdrawals once you reach 70 1/2. Roth IRAs, however, don't impose required minimum distributions (RMDs), which means that if you don't need to access your savings right away in retirement, you can leave that money alone and benefit from continued tax-free growth.

In fact, a Roth IRA can serve as a useful estate-planning tool, as yours can be left to your beneficiaries after you pass. And while your heirs, unlike you, will be subject to RMDs (unless you're leaving that money to a spouse, in which case RMDs don't apply), as long as your Roth is open for a full five years before withdrawals are made, they'll also get to enjoy the tax-free income your account provides.

There are plenty of good reasons to save for retirement with a Roth IRA, and the sooner you begin funding your account, the more time you'll give your money to grow. It pays to read up on how IRAs work so that you're better equipped to make the most of your account.