Rules for Roth IRAs: Eligibility, Contribution Limits, and More

Roth IRAs are one of the most beneficial retirement plans available. If you don’t have an employer-sponsored plan, you can open an individual Roth account to save money for your future. But, there are rules for Roth IRAs about eligibility, contributions, and funding you must understand first. This article explains those rules, and also covers how self-directing a Roth account can help you build retirement wealth.

Image of a stack of $100 bills with the words Roth IRA on it, illustrating this article's focus is rules for Roth IRAs.There are other ways besides employer-sponsored plans that allow you to save for retirement. Some available plans, such as the Roth IRA, may prove to be more beneficial than the average employee retirement account. Additionally, Roth IRAs can be self-directed, which means that you are in control of your own retirement funds and investing decisions.

When you self-direct your retirement plan, gain access to an incredibly large number of alternative investments such as real estate, precious metals, LLCs, private lending options—and much more. Many investors feel they have experienced higher returns in a shorter time frame in their self-directed IRAs than they may have realized with traditional investing methods. While nothing is guaranteed, those who self-direct appreciate the freedom and control they have in choosing investments they know and understand, which can potentially increase their odds of success.

With that being said, it is no secret that the Roth IRA is widely considered to be one of the most beneficial retirement savings tools around. Those able to use these accounts enjoy many advantages that include tax-free earnings and distributions as well as the ability to withdraw funds at the age of 59 ?, provided the account has been owned for five years.

Rules for Roth IRAs

Below is what you need to know if you are interested in a Roth IRA. No matter what your age, it’s never too late to begin planning a secure financial future.

Do I Qualify to Own a Roth IRA?

This rule for Roth IRAs is critical. If you aren’t eligible, you cannot contribute to a Roth account. With that being said, you can open a Roth IRA at any age, you must meet to qualify.

  • Your earned income must be at least as great as the contributions you make into the account.
  • Married and individual folks whose modified gross adjusted income exceeds limits set forth by the IRS are not eligible to open Roth IRAs.

Discuss these numbers with your CPA or financial advisor to ensure you are allowed to use these retirement plans.

How Do Contributions Work?

In comparison to traditional IRAs, where contributions are made before tax—saving taxation for distributions upon retirement, contributions to Roth IRAs are made after tax—allowing tax-free distributions. Any income gained by the account accrues tax-free provided that certain requirements are met.

The annual contribution limit to a Roth IRA for 2015 is $5500. However, if you are age 50 or older, add the allowed catch-up contribution of $1000 for a total of $6500.

Unlike other IRAs, there are no age caps on contributions, which means you can continue to sock money into these plans after you reach the age of 70 1/2.

When Can I Take Distributions?

As mentioned above, distributions from these accounts can be taken at the age of 59 1/2 if the account has been open for five years or more.

There are other exceptions that may qualify for tax-free distributions depending on your situation. You may qualify if you are disabled or are paying for qualified higher education expenses for yourself or a dependent. If you are buying a home for the first time you can take a tax-free distribution of up to $10,000 to do so. Again, check with your trusted tax professional to ensure your distributions are qualified. If they are not, your account could incur penalties and lose its tax-sheltered status.

How Can I Fund My Roth IRA?

Funding the account can transpire in several ways.

  • Make a contribution
  • Rollover funds from an existing plan such as an employer sponsored 401(k) or another IRA
  • Transfer funds from an account held by another custodian
  • Convert funds from a traditional, SEP, or SIMPLE IRA or 401(k), which means you would pay tax on the funds moving from the tax-deferred account into the Roth IRA

There is a certain way withdrawals are distributed, especially if you funded your account through a conversion. To learn more about rules for Roth IRAs, visit the Roth IRA page on our web site or consult your tax professional for more details.

If you would like to learn more about self-directing your Roth IRA or if you have questions about rules for Roth IRAs, please contact us.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.