2014 and 2015 Roth IRA Rules

Roth IRAs differ from traditional IRAs in that the money put into them isn’t tax deductible but withdrawals are. Roth IRAs also have no required distributions, there’s no age limit on contributions and they carry their own rules for eligibility and contribution limits.

Roth IRAs are seen as the smart IRA choice because the money in them is taxed when it’s put in, before it grows through investment. Traditional IRAs, by contrast, give investors a tax break early but generally result in a higher tax bill over the investor’s lifetime. We outline the unique Roth IRA rules below.

roth ira rules traditional iraTraditional IRA Rules

Since Roth IRA rules are based on traditional IRA rules, we’ll start there. Traditional IRAs are a way to save money for retirement with certain tax advantages. Money put into traditional IRAs is exempt from taxes. So someone who puts $5,000 of their income in a traditional IRA doesn’t have to pay any federal or state income taxes on that $5,000 of income. This gives U.S. citizens a great way to save money tax free in an account where it can be invested and grow for retirement. The money in traditional IRAs isn’t taxed until it’s withdrawn.

Traditional IRAs have contribution limits of $5,500 per year in 2014 and 2015. For those aged 50 and older, the limit is $6,500. Traditional IRA holders generally must start taking taxable distributions when they reach age 70 1/2.

roth ira rulesRoth IRA Rules

Roth IRAs differ from traditional IRAs in that contributions to them aren’t tax deductible, but the distributions from them are. People who own Roth IRAs can keep contributing to them even after age 70 1/2. Another difference is that there’s no requirement to take distributions from Roth IRAs after age 70 1/2. Taxpayers have to have earned income to contribute to a Roth IRA, and Roth IRAs carry their own rules about how much money can be contributed annually.

Roth IRAs Have Non Tax-Deductible Contributions

While money contributed to traditional IRAs doesn’t count against yearly taxable income, money put into Roth IRAs is subject to federal and state taxes. Uncle Sam is going to get its money either way, but Roth IRAs get taxed now while traditional IRAs are taxed later. Roth IRAs are seen as the smarter move because money put into them today and taxed today has a chance to grow, resulting in an overall lower tax bill.

roth ira rules taxFor example, imagine two people: one who has a traditional IRA and one who has a Roth IRA. They each put $5,000 into their respective IRAs. Person A with the traditional IRA puts his money in tax free, he doesn’t have to pay taxes on the contribution. Person B with the Roth IRA also puts in $5,000 and because of her tax bracket she has to pay $835 in taxes on that $5,000 in income. So far the score is: Person A, $0 in taxes, Person B, $835 in taxes.

Roth IRAs Have Tax Free Distributions

Let’s continue the example above of two otherwise equal people who choose different types of IRAs. Now suppose each person invests the money in their IRA and earns a 6% return. After 40 years, the $5,000 in each account has grown to over $50,000. Now they both begin to withdraw their money. For the sake of the example, let’s say the both withdraw it all at once. Person A has the traditional IRA and originally paid $0 in taxes, but now owes $8,300. Person B with the Roth IRA, who originally paid $835 in taxes, now owes nothing. Clearly, getting the taxes out of the way early before the investment grows is the way to go.

roth ira rules no required minimum distributionsRoth IRAs Have no Required Minimum Distributions

People with traditional IRAs generally have to start withdrawing the money after age 70 1/2. This rule is in place to prevent retirement money in IRA accounts from sitting there forever and never being taxed. Since the money in Roth IRAs has already been taxed, Roth IRA account holders can leave the money in them as long as they like.

The ability to leave money in a Roth IRA account is helpful in situations where retirees have other sources of income, such as a pension or other investments, and they want to keep their Adjusted Gross Income low. A retiree with a $50,000 investment income can leave their Roth IRA money untouched at first to keep their taxable income down, which ultimately reduces their annual tax bill.

roth ira rules 70Roth IRA Owners Can Contribute After Age 70 1/2

Traditional IRAs can’t accept contributions after age 70 1/2. This rule exists to stop retirees with other sources of income from realizing tax breaks on it by putting it into IRA accounts tax free. Since contributions to Roth IRAs are taxable, there’s no reason for the IRS to prevent people over the age of 70 1/2 from continuing to put money in them.

Whether the lack of age restrictions on Roth IRA contributions is helpful or not depends on how long a retiree lives. A 71 year old who contributes $5,000 a year to a Roth IRA and invests it at 6% can see a $70,000 tax free payout at age 81.

roth ira rules requirementsRoth IRA Eligibility

To qualify for a Roth IRA, a taxpayer must have “earned” income. That means income from wages or salary from a job or small business.

Individuals who make more than $129,000 a year are ineligible for Roth IRAs. Married people will likely want to file jointly to take advantage of Roth IRAs, since those who file separately and make over $20,000 a year combined aren’t eligible. Couples who file jointly must make less than a combined annual amount of $191,000 to qualify for a Roth IRA.

Roth IRAs carry phase-out income levels also. Individuals who earn more than $114,000 per year and married couples filing jointly who earn more than $181,000 are subject to reduced contribution limits.

Limits on Roth IRA Contributions

The amount a taxpayer can contribute to a Roth IRA depends on several factors, including filing status and Adjusted Gross Income. The table below from the IRS website shows Roth IRA eligibility and contribution limits.

roth ira rules contribution limits

Other Roth IRA Rules

  • Accounts must be designated as a Roth IRA accounts from the beginning.
  • Contributions for any year can be made until April 15th of the following year.
  • People with 401k or other employer-based plans can also contribute to Roth IRAs.
  • Contributions can’t be greater than the amount of earned income.
  • The earned income rule is waived if a taxpayer’s spouse has earned income.