Do I qualify for a Roth IRA? What rules determine whether I qualify? Are there more details about how Roth IRAs operate that I should know before opening one? These are some of the questions that you may have in mind if you are considering using a Roth IRA as your retirement investment vehicle. In today’s article, I will take you through much of what you need to know before you get started, so read on till the end to find out more.
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Roth IRAs can be a great way to put aside funds for your retirement years. Unlike Traditional IRAs, Roth IRAs allow investors’ funds to grow tax-free. As a Roth IRA owner, you can also take tax-free withdrawals of your contributions at any time. Note that your investment earnings from the Roth IRA cannot be withdrawn at any time, and there are rules that you must stick to when withdrawing them.
Do I qualify for a Roth IRA? – Roth IRA Eligibility
The first primary requirement for one to open and contribute to a Roth IRA is having an earned income. Eligible income is classified into two, as explained below:
- The first type of eligible income is one in which you get to work for someone who pays you. This also includes all the commissions, tips, bonuses, and taxable fringe benefits that you get as you work for the person who has employed you.
- The second type of eligible income is opening and running your own business or firm.
Other types of income that are treated as earned income when one is making Roth IRA contributions are:
- Taxed alimony
- Untaxed combat pay
- Military differential pay
Any type of income that you get from your securities, rental properties, or other assets is viewed as unearned income, hence can’t be contributed to your Roth IRA. Below are some other types of income that are not perceived as earned income:
- Child support
- The wages earned by penal institution inmates
- Nontaxable alimony
- Social security retirement benefits
- Unemployment benefits
There is no age threshold or limit for one making Roth IRA contributions. Does this mean that even teenagers who are taking summer jobs can open and fund IRAs? Yes, they can. The account may have to be a custodial account if they are underage.
On the other end of the spectrum, employed people who are in their 70s can still continue making their contributions to their Roth IRAs. People of all ages are also allowed to contribute to traditional IRAs. In the past, however, those with traditional IRAs could not make contributions to their accounts after hitting 70 ½ years. The December 2019 SECURE Act however made it possible for people to make traditional IRA contributions with no age cutoffs/restrictions.
Also, the fact that you have another qualified retirement plan does not mean that you are not eligible to contribute to a Roth IRA. If you, as such, have the money, and you meet the set income limitations, you are free to contribute to a 401(k) plan at work as you also contribute to a Roth IRA.
Roth IRA Income Limits
Your eligibility to contribute to a Roth IRA also depends on the amount of money you earn annually. The IRS does not allow high-income earners to open and contribute to a Roth IRA. The income limits are based on a person’s modified adjusted gross income (MAGI), as well as their tax filing status.
MAGI = Adjusted Gross Income (AGI) from your tax return + Deductions (student loan interest, self-employment taxes, or even higher education expenses).
In 2022, you are allowed to make full Roth IRA Contributions provided that you earn less than $129,000, or partial contributions up to the set maximum MAGI of $144,000. If you and your partner are filing jointly, your income limits are set at $204,000 and $214,000 respectively.
Most people usually qualify to make the maximum possible contributions to a Roth IRA, which is $6000 ( or $7000 for those aged 50 and above). If your MAGI falls within the Roth IRA phase-out range, you can make partial contributions. You are, however, not allowed to open a Roth IRA or make contributions to one, if your MAGI falls outside the limits.
Note that the IRS usually updates the Roth IRA income limits each year, due to factors such as inflation, and other changes in the national and global economy.
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Roth IRA Withdrawal Rules
Unlike traditional IRA owners, you do not have to worry about the Required Minimum Distributions (RMDs) if you are a Roth IRA owner. You can start withdrawing your Roth IRA contributions at any time, for any reason, without owing taxes or penalties.
Withdrawals on your Roth IRA investment earnings work differently. Generally, you are allowed to withdraw the earnings with no penalties or taxes provided that you are 59 ½ years or older, and have been a holder of the account for not less than 5 years. This is referred to as the five-year rule.
Your withdrawals may as such be subject to taxes or a 10% penalty, depending on your age, as well as whether you meet the five-year rule.
The who meet the five-year rule is:
- Under 59 ½ years – your retirement earnings are subject to taxes and penalties. You may, however, avoid the taxes if you are withdrawing the money to meet your needs owing to disability, or to purchase a first-time home. Also, upon passing away, your beneficiaries may withdraw the money without getting taxed.
- 59 ½ years and above – do not get penalized or taxed.
Those who fail to meet the five-year rule, and are:
- Under 59 ½ years – have their earnings subjected to taxes and penalties. They may only avoid the penalties on their distributions if they want to make first-time home purchases, meet the higher education expenses, or have unreimbursed medical expenses. Their beneficiaries may also avoid penalties on distributions taken upon death.
- 59 ½ years – the earnings are subject to taxes, not penalties
As you check whether you qualify for a Roth IRA, you can also check whether you qualify to invest in a self-directed IRA, through which you can build wealth by investing in non-traditional assets such as gold and silver. Check out our top-recommended Gold & Silver IRA service providers below:
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That will be all for this article, in which we have answered the question, “Do I qualify for a Roth IRA?”. I hope the article was educational and helpful, and that you now know what to do about opening this type of retirement investment plan. Let me know if you have any questions about today’s topic, or about self-directed IRAs.
I wish you well,
Eric, Investor and Team Member at Gold Retired.
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