Can I Get Tax Deductions With a Roth IRA?

While you can’t deduct your contributions to a Roth individual retirement arrangement account, these retirement vehicles hold many other advantages. If you really need the tax deductions, you might contribute to a traditional IRA and take the deductions if you are not covered by an employer-sponsored retirement plan, or if you contribute to a spousal IRA. But it could benefit you to look into what a Roth IRA offers before making the decision.

Roth IRA Basics

Whether you are contributing to a Roth IRA or a traditional IRA, you can only contribute earnings from a job, not gifted monies or investment funds. A contribution to a traditional IRA is made with pretax dollars, so you don’t pay taxes on your traditional IRA earnings until you begin making withdrawals in retirement. Roth IRA contributions are made with post-tax dollars, so they are not deductible. However, when you start making withdrawals in retirement, you don’t pay a penny of tax on your earnings.

There’s another consideration when contributing to a Roth IRA. Unlike traditional IRAs, which are subject to mandatory withdrawals by age 70 1/2, you never have to make any withdrawals from a Roth IRA. That makes it an ideal vehicle for passing funds to your heirs and beneficiaries.

Required minimum distributions do go into effect for heirs after the death of the original account holder. If you leave your Roth IRA to a child or grandchild, it is possible for them to stretch out distributions over their lifetime.

Roth IRA Investments

As with traditional IRAs, you have a wide range of investment vehicles in which to put your Roth IRA funds. This includes stocks, mutual funds, money market accounts and certificates of deposit, bonds or real estate. The Internal Revenue Service does not permit IRA investments in collectibles, gems, antiques, art, coins or life insurance. You also can’t invest in alcoholic beverages, such as rare wines.

Roth IRA AGI Limits

There is no adjusted gross income limit for contributing to a traditional IRA, but that is not true for Roth IRAs. For 2018, a person filing singly, head of household or married filing separately may make the maximum contribution if their income does not exceed $120,000. If their income is between $120,001 and $135,000, they may make a partial contribution. If their AGI is above $135,000, they do not qualify for a Roth IRA.

A married couple filing jointly can both make the maximum Roth IRA contribution if their AGI is $189,000 or less. If their income ranges between $189,001 and $199,000, they may make a partial contribution. If their AGI is above $199,000, they cannot contribute to a Roth IRA.

For 2019, a person filing singly, head of household or married filing separately may make the maximum contribution if their income does not exceed $122,000. If their income is between $122,001 and $137,000, they may make a partial contribution. If their income exceeds $137,000, they cannot contribute to a Roth IRA.

A married couple filing jointly in 2019 can both make the maximum Roth IRA contribution if their AGI is $193,000 or less. If their income ranges between $193,001 and $203,000, they may make a partial contribution. If their AGI is above $203,000, they are not eligible to make Roth IRA contributions.

Roth IRA Contribution Limits

For 2018, the maximum Roth IRA contribution limit is $5,500 for those under age 50 and $6,500 for those 50 and up. For 2019, the maximum Roth IRA contribution limits rise to $6,000 for those under age 50 and $7,000 for those 50 and up.

Note that if you don’t have earnings meeting the maximum contribution limits, you cannot contribute the full amount. For example, if you had a part-time summer job and earned $4,000, you can’t contribute the maximum if those were the only employment earnings you had. You can, however, contribute the full $4,000.

If you decide you want to contribute money to both a traditional and Roth IRA, that’s fine, but the contribution limits are the same for both types of retirement accounts. If you want to contribute $3,000 each to a traditional IRA and Roth IRA in 2019, you can do that. However, your contributions to both accounts cannot exceed the $6,000 limit if you are under 50. If eligible, you can deduct the contribution to your traditional IRA.

Rules for Older Workers

More and more people are working past traditional retirement age. The IRS requires that individuals with traditional IRAs and employer-sponsored retirement plans such as 401(k)s must take mandatory withdrawals by the time they are 70 1/2. If you’re still working at that point and want to continue saving for retirement, you can do so with a Roth IRA, which has no age limits for contributions. As noted, there are no mandatory withdrawal requirements for a Roth IRA.

Converting Traditional IRA to Roth

If you already have a traditional IRA and want to convert it to a Roth IRA so you can enjoy the latter’s long-term tax advantages, you can do so if you don’t mind paying some initial taxes. When you make such a conversion, the IRS considers the withdrawn amount as a taxable distribution from the traditional IRA. You’ll likely face a larger federal tax bill for that year, and your state tax bill may also increase. However, under the Tax Cuts and Jobs Act, signed into law by President Donald Trump on Dec. 22, 2017, you can no longer reverse a traditional IRA to Roth IRA conversion.

When does it make sense to convert a traditional IRA to a Roth IRA? It’s a good plan for those who think their income in retirement will probably remain about the same amount as their income during their working years.

Early Withdrawals Without Penalty

If you need to withdraw funds from your traditional IRA before reaching age 59 1/2, the IRS levies steep penalties. Not only is the amount withdrawn included in your gross income for tax purposes for that year, but you must pay a 10 percent penalty. There are hardship exceptions to an early traditional IRA withdrawal, but with a Roth IRA, you can make early withdrawals relatively easily if the account has been open at least five years.

Keep in mind the five-year rule is in effect even if you are 59 1/2 or older but the Roth IRA account has been open for less than five years. The five years start from Jan. 1 of the initial year in which you made the first contribution. You can withdraw your post-tax contributions to a Roth IRA at any time, but if you don’t meet the five-year rule, you face a 10 percent penalty on your earnings.

Under IRS regulations, Roth IRA distributions are taken in the order of contributions, rollover contributions or conversions, and earnings. In a worst-case scenario, your Roth IRA can serve as an emergency fund.

Exceptions to Five-Year Rule

There are exceptions to the five-year rule if you are withdrawing money to purchase your first home (up to $10,000), paying higher education expenses for yourself or family members, or paying for medical expenses exceeding 10 percent of your AGI. If you lose your job, you can make early Roth IRA withdrawals without penalty if the funds are paying for your medical insurance premiums.