A huge benefit provided by the IRS for those who are saving for retirement is the ROTH IRA.
Post tax ‘earned income’ (income has to be from wages and not dividends or capital gains) is contributed into a Roth account where it can be invested.
- Contributions (that were not rolled into a ROTH) may be withdrawn without penalty.
- Earnings, both dividend and capital gains may be withdrawn tax free after age 59 1/2
- Unlike regular IRA’s/401K plans there is no minimum withdrawal requirement at age 70 1/2
- You may pass Roth IRA’s to your heirs.
It is possible to do an IRA rollover contribution to a Roth. This rollover can come from a 401K or regular IRA account. This rollover IS not subject to the regular Roth income limits. But the rollover will be subject to regular ordinary income taxes.
Example, if you are in a 25% income tax bracket and rollover $20,000 from a traditional IRA (or 401K) into a Roth IRA. That rollover would create an additional $5,000 in income tax liability. The advantage is any earnings thereafter would be tax free upon withdrawal after turning 59 1/2.
Also on contributions you have a 5 year rule. The account must be opened for 5 years, & if you are 59 1/2 years of age, you can withdraw tax free and penalty free. Under 5 years but over 59 1/2, with a couple of very specific exceptions, you will owe taxes but no penalties.
There are some very specific situations for Roth IRA rules involving first time home purchases (up to $10K lifetime), education expenses, unreimbursed medical expenses, disability, death, substantially equal payments etc that arent’ covered here.