What Are the Details for Roth IRA Contributions This Year?
For 2019, the yearly maximum on Roth IRA contributions is $6,000, and if you are over 50 that’s increased to $7,000 with the possibility of an additional $1,000 per year in catch-up contribution. In 2020, those amounts did not increase.
The actual amount that you can contribute will also depend on your income. For a single filer in 2020, modified adjusted gross income (AGI) must be less than $124,000 to contribute the maximum. For those married and filing jointly, modified AGI must be less than $196,000. If you make more than those amounts, your contributions will begin to be limited below the maximum, up to the point where you are not allowed to add any money to a Roth IRA (at $139,000 for single or $206,000 for married and filing jointly). Those income limits are higher in 2020 than 2019.
The biggest difference between Roth IRAs and traditional IRAs is in when tax is taken out of the contribution. A Roth contribution is taxed now, when you put it into the Roth IRA, at whatever your tax bracket currently is. Roth withdrawals are not taxed any further so long as you only take the money out once you are at least 59½ (and have had the Roth for at least five years). A traditional IRA contribution is taxed when you withdraw it (usually in retirement) at your tax rate then.
Roth IRAs also do not have required minimum distributions (RMDs) after 70½, as traditional IRAs do. You can also deposit into a Roth IRA no matter your age, so long as you earned income from an employer or from being self-employed. In contrast, traditional IRAs close the door on contributions at 70½.
There is no minimum age for a Roth IRA, so they are recommended for everyone. It’s worth noting that the earlier you start investing in a Roth IRA, the greater the advantages as it gives more time for the contents to accrue without further taxation. It is required that you have earned income to either contribute to a Roth IRA or to receive a gift to your Roth IRA (another nice option). Note that gifting into a Roth IRA from another person can’t circumvent the maximum yearly contribution we talked about above.
Roth IRAs often serve as a core component to retirement planning because they allow for choice in when to apply taxation. A diverse portfolio of retirement options means that you can choose whether to take from an account that will be taxed on withdrawal (like a traditional IRA) or one that will incur no further tax (like a Roth IRA).
Talk to your financial planner or estate planning attorney to discuss how to best take advantage of IRAs, both Roth and traditional.
Updated October 2021
Reference: Kiplinger (January 10, 2020) “How Much Can You Contribute to a Roth IRA for 2019?”; Kiplinger (October 1, 2020) “Roth IRA Contribution Limits for 2020”