March 16, 2017 in Taxes

Roth IRA’s many fantastic features make it an ideal investment during tax season

You have until the April tax-return-filing deadline to set up an IRA for the 2016 tax year. You read that right.

And while it doesn’t matter whether your contribution is to a traditional IRA or a Roth IRA, many taxpayers prefer the Roth. With a Roth account, you won’t get an immediate tax break, but you won’t pay any tax on your money when you eventually take it out.

The IRS, however, has specific rules on just who can have a Roth IRA and how much money can be contributed each year.

Income limits

The first Roth IRA eligibility consideration is income. You must earn money to open any IRA. If your only income is from unearned sources, such as investments, you cannot contribute to an IRA. You must get paid wages, a salary, tips, professional fees or bonuses.

Roth IRA contribution limits
2016 2017
Younger than 50 $5,500 $5,500
Age 50 or older $6,500 $6,500

And you can’t put more money than you make in any IRA. So if your income is only $1,500, then $1,500 is the most you can contribute to a Roth.

There is an exception that allows Roth accounts for nonworking spouses. If you and your spouse file a joint return but one does not work, the employed spouse can open and contribute to a Roth IRA for the unemployed partner.

Generally, the contribution limits for a spousal IRA are the same as for the account held by the working wife or husband.

But if you make too much money, you’re not eligible to open a Roth or to contribute to the account you opened when you were earning less. For a Roth, your earned income — with some deductions you might have taken, such as for student loan interest, added back in — must meet certain criteria.

Note that if a Roth doesn’t work for you, you can contribute up to $250,000 in an FDIC-insured money market account.

No 2016 Roth if you make more than:

If you’ve already contributed to your Roth for the 2016 tax year and now want to contribute for 2017, this year’s income limits are:

Even if you’re not quite at the top of these pay ranges, your Roth contribution could be limited if your modified adjusted gross income falls within certain ranges.

Roth limited for income:

You still can add to your Roth in these cases, but not the full allowable amount. Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), contains worksheets and examples to help you determine your reduced Roth IRA contribution amount.

You can make much more generous contributions to a workplace retirement plan. Use Bankrate’s 401(k), 457 and 403(b) deductions calculator to see the impact on your take-home pay.

Roth conversion taxes

Years ago you could not convert a traditional IRA to a Roth account if you made more than $100,000. Now, regardless of your earnings, you can turn your old retirement account into a Roth.

Such conversions, however, require you to pay taxes on any traditional IRA money on which taxes were deferred.

Those taxes must be paid by the time you file your return for the tax year in which the traditional IRA is converted to a Roth.

No age limits for Roth IRA

Finally, one of the more appealing Roth IRA rules is the lack of an age limit. While traditional IRA contributions are barred for individuals older than 70 1/2, you can be any age and still contribute to a Roth IRA if you’re earning money.

And you can leave money in your Roth for as long as you live. The IRS doesn’t require minimum distributions as it does with traditional IRAs. This makes the Roth IRA an ideal estate planning tool for leaving money to future generations.