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Roth IRA

A Roth IRA allows an investor of any age that income qualifies to save for retirement. Contributions are made with aftertax dollars and offer the potential of tax-free withdrawals and there are no lifetime minimum distributions. 

Overview

Overview

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What is a Roth IRA?

A Roth IRA is a potentially tax-free retirement account available to individuals that have earned income and income qualify. Roth IRA contributions are made with aftertax dollars, but distributions, including earnings, are withdrawn tax-free if certain conditions have been satisfied.

How does a Roth IRA work?

Roth IRA contributions, unlike a traditional IRA which can offer a tax deduction, are always funded with aftertax dollars. The account grows tax-deferred, and withdrawals including accumulated earnings, may be tax-free. In addition, Roth IRAs are not subject to lifetime required minimum distributions

In 2019, an investor may contribute up to $6,000 to a Roth IRA, plus a catch-up contribution of $1,000 for those investors age 50 and older. Contributions may be made at any time throughout the year, and as late as the investor’s tax filing deadline (generally April 15th) for the prior year.

Who should consider a Roth IRA?

  • An individual that wants to accumulate tax-free retirement funds
  • An individual that believes future tax rates will be higher than today’s
  • An individual that wants to leave his/her beneficiaries a potentially tax-free inheritance


What benefits does a Roth IRA offer?

  • Withdrawals, including earnings, are potentially tax-free
  • Tax diversification (taxable vs. tax-free)
  • Beneficiary payouts can be structured in such a way (“Stretch IRA”) allowing for tax-free payouts 
  • No lifetime required minimum distributions 

 

EASY_IRA_Banner_v1
saving rolling

Eligibility

Eligibility

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

Who is eligible to make Roth IRA contributions?

An investor can establish a Roth IRA if the following rules are met:

  1. Earned income and
  2. Income qualify

“Spousal IRA”: A working spouse can establish and contribute to a nonworking spouse’s IRA. To qualify, the couple must also file a joint tax return. Spousal IRAs can be traditional or Roth IRAs. 

How does an income test affect Roth IRA eligibility?

An individual’s modified adjusted gross income (MAGI) must be below certain thresholds to be eligible to make Roth IRA contributions. Level of income is determined by marital and tax-filing status.

Single:

In 2018, single individuals can make a full Roth IRA contribution when income is $120,000 or less ($122,000 or less in 2019). A partial contribution is allowed if income is greater than $120,000 but not more than $135,000 ($122,000–$137,000 in 2019). 

Married (filing jointly):

In 2018, couples filing jointly can make a full Roth IRA contribution if their MAGI $189,000 or less ($193,000 in 2019). A partial contribution is allowed if income is greater than $189,000 but not more than $199,000 ($193,000–$203,000 in 2019).

Married (filing separately):

In 2018 and 2019, couples filing separately are ineligible to make a Roth IRA contribution if their MAGI is $10,000 or more.

Roth IRA Income limits:

Status

And modified adjusted gross income (MAGI)1 is...

Then...

Married filing jointly or qualifying widowers

Less than $189,000 in 2018 ($193,000 in 2019)

Contribution may equal: $6,000 and if age 50 or older $7,000

At least $189,000, but less than $199,000 in 2018 ($199,000 and $203,000 in 2019)

The contribution amount is proportionately reduced

$199,000 or more in 2018 ($122,000 in 2019)

Ineligible

Single, head of household, or married filing separately and spouses did not live with each other at any time during the year

Less than $120,000 in 2018 ($122,000 in 2019)

Contribution may equal: $6,000 and if age 50 or older $7,000

At least $120,000 but less than $135,000 in 2018 ($122,000 to $137,000 in 2019)

Contribution amount is proportionately reduced

$135,000 or more in 2018 ($137,000 in 2019)

Ineligible


Can an investor convert their existing traditional IRA(s) to a Roth IRA?

Yes. All investors regardless of age or income, including those with SEP and SIMPLE IRAs (two year hold period must be satisfied), are eligible to convert all or a portion of their assets to a Roth IRA. Distributing pretax IRA assets to a Roth IRA via conversion is a taxable event—subject to taxation in the year the conversion takes place. However, if the account is held for five years and until age 59½, all proceeds, including earnings, are distributed free of income taxes.

Who should consider a Roth IRA conversion?

  • An individual that wants tax-free income
  • An individual that believes future tax rates will be higher than today’s
  • An individual that wants tax diversification
  • An individual that does not want or need to take required minimum distributions
  • An individual that wants to leave his/her beneficiaries a potentially tax-free inheritance

 

1Modified adjusted gross income (MAGI) includes wages, interest, capital gains, income from retirement accounts and alimony paid received by the taxpayer adjusted downward by specific deductions, including contributions to deductible retirement accounts and alimony paid by the taxpayer; but not including standard and itemized deductions.

Open an IRA

  1. Complete the writable IRA Application

  2. Print and send to Lord Abbett by mail, fax, email or use our Free FedEx shipping option

  3. You’ll receive a confirmation once your IRA is established

Contributions

Contributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

How much can an investor contribute to a Roth IRA?

In 2019, an investor may contribute up to $6,000 in a Roth IRA, plus a catch-up contribution of $1,000 for those investors age 50 and older.

YEAR

Contribution Limit

Age 50 Catch-up Contribution

2018

$5,500

$1,000

2019

$6,000

$1,000

Can an investor contribute to both a traditional and Roth IRA?

Yes, assuming the investor meets Roth IRA eligibility requirements. However, an investor has one combined contribution limit of $6,000 ($7,000 if age 50 or older).

When can an investor contribute to a Roth IRA?

An investor can make Roth IRA contributions anytime throughout the year. In addition, contributions for the prior year can be made as late as the investor’s tax filing due date (generally April 15th) not including extensions. For example, an investor is eligible to make a 2018 IRA contribution as late as April 15, 2019.

Why would an investor fund a Roth IRA if the contribution is not tax deductible?

Earnings in a Roth IRA grow tax-deferred until withdrawn. If the investor has held the account for five years and reaches the age of 59½, all funds are withdrawn tax-free. Unlike traditional IRAs, minimum distributions are not required at age 70½ from a Roth IRA.

What if the Roth IRA contribution limit is exceeded?

An investor needs to remove the excess funds by their tax filing deadline (April 15th), plus extension, or face a 6% excise tax on the excess contribution. 

Distributions

Distributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What types of distributions can be taken from a Roth IRA?

A Roth IRA account owner can always withdraw their contributions (basis) without tax or penalty at any time or age. The power of a Roth IRA is that an investor’s earnings can be distributed tax-free so long as certain criteria are satisfied, referred to as a qualified distribution.

There are a number of different kinds of distributions that can be taken from a Roth IRA. We briefly summarize each distribution type below:

What is a qualified distribution?

A qualified distribution from a Roth IRA, including earnings, is federally tax-free if the account owner: 

  1. Held the Roth IRA for five years, and
  2. Attained age 59½ or is disabled


What is a non-qualified distribution?

Because earnings on a Roth IRA are pretax, while contributions are funded with aftertax dollars, a Roth IRA account owner receiving a non-qualified distribution is subject to tax on the earnings portion only. In addition, the 10% early withdrawal penalty applies if the account owner has not reached age 59½ and an exception does not apply.

Are Roth IRAs subject to lifetime required minimum distributions (RMDs)?

No. A Roth IRA account owner upon reaching age 70½ is not required to take a minimum distribution. 

What is the 60-day withdrawal and rollover rule?

Once in a 12-month period, an IRA account owner may withdraw any amount, for any reason, from any of their IRAs, and repay the IRA within 60 days without being subject to taxation or an early withdrawal penalty. If not repaid within the allotted 60-day time frame, the account owner will be subject to potential taxation and penalties.

Recent guidance clarifies that one IRA rollover per year now applies on a per-taxpayer basis—not per IRA. Therefore, an investor can elect a single 60-day withdrawal and rollover in a 365-day period regardless of the number of IRAs they own.

What death benefits are available from a Roth IRA?

When a Roth IRA account owner dies, an inherited or beneficial IRA is created. However, inherited Roth IRA treatment differs depending on who inherits the account. Roth IRAs inherited by a surviving spouse differ from a non-spouse beneficiary.

Spousal beneficiary:

A spousal beneficiary has the following options available upon inheriting a Roth IRA:

  • Treat the account as their own
  • Rollover into their own Roth IRA
  • Remain a beneficiary. 


Non-Spouse Beneficiary:

Inheriting a Roth IRA from someone other than a spouse provides more limited options. 

A non-spouse beneficiary has the following options available upon inheriting a Roth IRA:

  • Liquidate the entire account. The five-year holding period must be satisfied or the earnings portion of the distribution will be subject to taxation.
  • Make withdrawals equaling the entire account value by the end of the fifth calendar year following the account owner’s death.
  • Stretch” the withdrawals over the beneficiary's life expectancy


What is a Stretch IRA?

A Stretch IRA is a distribution strategy available to an IRA beneficiary. The beneficiary “stretches” withdrawals over the beneficiary’s life expectancy.

Click here for more information on our Stretch IRA.

We also offer a calculator to assist in providing you minimum payout amounts.

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