While not tax-deductible, contributions to a Roth IRA give you the opportunity to create a tax-free savings account. You can use this account during retirement or leave it as an inheritance for your heirs. Roth IRAs offer many of the advantages of regular IRAs, but with more flexibility. They work well for people who are more likely to need tax relief later than before.
Opening one is easy, and there are many great Roth IRA providers who handle these accounts. Using this definition of compensation, if your income exceeds the Roth IRA limit or is zero for a tax year, you cannot contribute to a Roth IRA for that year. If you're considering opening a Roth IRA at a bank or brokerage where you already have an account, see if existing customers receive any discounted IRA fees. If you think you'll be in a higher tax bracket when you retire than you are now, a Roth IRA may be more beneficial than other retirement accounts, such as a traditional IRA.
However, you can contribute to a Roth IRA and make cumulative contributions to a Roth or traditional IRA, regardless of your age. Under certain conditions, Roth IRAs also allow tax-free withdrawals of earnings, which are taxable in a traditional IRA. Spouse Roth IRA contributions are subject to the same rules and limits as regular Roth IRA contributions. People with traditional IRAs must begin taking the required minimum distributions when they turn 72, but there is no such requirement for Roth IRAs.
You may be able to get around income limits by converting a traditional IRA to a Roth IRA, which is called a backdoor Roth IRA. Roth IRAs offer you tax-free withdrawals after retirement, while traditional IRAs give you tax exemption beforehand. Consider opening a Roth IRA instead of a traditional IRA if you're more interested in earning tax-free income when you retire than in a tax deduction now when you contribute. This and other key differences make Roth IRAs a better option than traditional IRAs for some retirement savers.
One method of conversion is to take a distribution from the traditional IRA and contribute (rollover) it to a Roth IRA within 60 days of the distribution date. Each year you make a Roth IRA contribution, the custodian or trustee will send you Form 5498, IRA Contribution Information. If you want the widest range of investment options, you need to open a Roth Self-Directed IRA (SDIRA), a special Roth IRA category in which the investor, not the financial institution, manages their investments. The Roth IRA's five-year rule states that you cannot withdraw tax-free earnings until at least five years after you first contributed to a Roth IRA.
Because withdrawals from the Roth IRA are made on the FIFO basis mentioned above, and earnings are not considered to be modified until all contributions have been made first, your taxable distribution would be even less than a Roth IRA.