Roth IRA Tax Summary

If you want to maximize the Roth IRA tax benefits, you should know the Roth IRA tax rules and learn how they work. If you are eligible for a Roth IRA, you may enjoy many tax advantages different from other investment accounts you had before.

Eligibility

The annual contribution limit depends on your tax-filing status and modified adjusted gross income(MAGI). If you're single and earn less than $105,000 a year, you can make a full contribution. If you're married joint filer, your joint income should be less than $166,000 for a full contribution. If your income exceeds the limit, the amount you can contribute will be phased out to zero. See income limit details here.

Contribution

There is no tax deduction on the Roth contributions. That means you have to use after-tax money for contributions. However, your earnings are still tax-deferred. Considering the power of compound interest, earnings without paying taxes may result in big differences.

Conversion

When you make a Roth conversion, you may be subject to federal income taxes for all or some of your conversion. And the conversion may place you in a higher tax bracket for the conversion year. If you have to tap into your IRAs to pay the tax, you may lose the potential benefit of tax-free growth on the full amount of the conversion and potentially incur 10% early withdrawal penalty if you are under age 59 1/2.

Distribution

You can withdraw your Roth IRA contributions completely tax-free at any time. Also earnings can be withdrawn tax-free if the withdrawal is a qualified distribution.

Tax Credit

You can claim a non-refundable tax credit as high as 50% of your Roth IRA contributions if you meet all of the following criteria below.

• You are 18 years old or older.
• You are not a full time student.
• You are not claimed as a dependent on someone else's tax return.
• Your adjusted gross income(AGI) must not exceed $55,500 if you are a married joint filer, $41,625 if you file as head of household and $27,750 if you are single or other category of filer.

The maximum Roth IRA contribution taken into account is $2,000 per individual. That means the maximum tax credit may be $1,000 per person.

Your eligible contributions can be reduced by the total distributions you received from your retirement plans during the testing period which consists of the year the credit is claimed, the period after the end of the credit year but before the due date (including extensions) for filing the return for that year, and the 2 tax years before that year.

If you want to claim the tax credit, you can use Form 8880, Credit for Qualified Retirement Savings Contributions.

Penalty tax

If the withdrawals are not qualified distributions, there may be the 10% additional penalty tax on withdrawals of earnings. If some exceptions apply, you may not have to pay the Roth IRA early withdrawal penalties.

Contribution deadline

The Roth IRA account must be established and funded by April 15 of the following year for the current tax year, unless April 15 falls on a Saturday or Sunday.