Roth IRA is a type of individual retirement account in the United States that allows you to take tax-free withdrawals. There are some conditions, however, that must be met in order to take advantage of tax-free distributions. In this article, we will go over the requirements for contributions, taxes on withdrawals, and penalties for early withdrawal.
Contributions to a Roth IRA
While contributions to a Roth IRA are not tax-deductible, you won’t have to pay federal taxes on qualified withdrawals when you reach the age of 59 1/2. If you’re not in that bracket yet, you may want to wait until you are older before making such a withdrawal. A tax professional can help you decide whether to make this type of withdrawal.
To make a Roth IRA contribution, you must be earning taxable income. This type of account isn’t available for people who receive inherited IRAs. Traditional IRA contributions are tax-deductible to the extent they’re made out of pre-tax money.
Rules for converting a traditional IRA to a Roth IRA
Rules for converting a traditional IRA into a Roth IRA are relatively simple. First, you should know that you have two years from the time you first opened your traditional IRA to be able to convert it to a Roth IRA. Once you have completed your conversion, you can continue making contributions to your traditional IRA until you file your tax return.
The clock for calculating the amount of time it takes to convert the funds starts at the start of the calendar year in which you make the conversion. In other words, if you convert funds from a traditional IRA to a Roth one on Dec. 31, 2021, you would have four years before you have to touch that money again. The reason for this is that you’ll be taxed when you withdraw the money from a traditional IRA. A Roth account is tax-free from the time you first open it, so you’ll never pay taxes on earnings or withdrawals.