Roth IRAs: 8 Essential Rules and Strategies to Know

Posted in , , , By David M. Smith

Roth IRAs can be an excellent retirement savings vehicle for many people. They offer the ability to save for retirement with after-tax dollars, accumulate tax-free earnings, and withdraw money tax-free down the road. In simple terms, you trade a potential tax break today for tax-free withdrawals later. 

There are several rules to follow and strategies to consider before using Roth accounts.  This article covers the following topics:

  1. IRA contribution limits
  2. Roth IRA income limits
  3. Roth IRA withdrawal rules
  4. Required minimum distributions
  5. Roth conversions
  6. Backdoor Roth IRAs
  7. Roth 401(k)s
  8. What makes Roth IRAs great

1. IRA contribution limits

For 2019 the maximum contribution for both Traditional and Roth IRAs is $6,000, plus an additional $1,000 catch-up contribution available for those who are age 50 or over at any point during the year. You have until the tax filing deadline to make your contributions for the prior tax year, excluding extensions. For the 2019 tax year, the tax filing deadline is April 15, 2020.

2. Roth ira income limits

There are income limits that determine if you are eligible to contribute to a Roth IRA account.

The income limitations are based on modified adjusted gross income (MAGI), which is your adjusted gross income with several items added back (Click here for how to calculate your MAGI). For 2019 the MAGI limits are:

Roth IRA Income Table

Click here for the IRS Income Limit Table

  1. This rate also applies to those filing as head of household or married filing separately and who did not live with their spouse at any time during the year.
  2. Qualified widow or widower status allows those who qualify to retain the benefits of filing married filing jointly for up to two years after the death of their spouse under certain circumstances.

The phase-out range still allows for contributions, but at a reduced rate. For example, a married joint filer with MAGI of $198,000 would be eligible to contribute half of the $6,000 amount to a Roth. You could still contribute the rest of the $6,000 (or $7,000 if 50 or over) to a traditional IRA account either on a pre-tax or post-tax basis depending upon your situation.

Note for those whose filing status is married filing separately and who have not lived with their spouse at any point during the year, there are separate and much lower income limits.

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3. roth ira withdrawal rules

Roth IRAs are not subject to taxes upon distribution as long as several rules are followed.

The five-year rule is key to understand. The rule says that once you have reached age 59 ½ you can withdraw any or all of the money in your Roth IRA account tax-free as long as your initial deposit to a Roth IRA account was made at least five years ago. The five-year clock actually starts on January 1 of the year in which you make that initial deposit, even if the actual deposit was made later in the year.

It's important to note that there are actually two Roth IRA five-year rules. Besides the rule governing contributions, there is a separate five-year rule governing money converted to a Roth IRA from a Traditional IRA. If you have Roth IRA funds from both sources, you will need to be cognizant of this rule when taking withdrawals from your account.

In addition to the five-year rule, there are several other rules to be aware of for Roth IRA distributions. You can always withdraw your own contributions to a Roth IRA penalty and tax-free. In some cases, you might have to pay taxes and penalties on the earnings in your Roth IRA account. Qualified distributions will be free of both income taxes and penalties. Non-qualified distributions could be subject to both income taxes plus a 10% penalty.

  • Qualified Roth IRA distributions must be taken at least five years after your initial Roth IRA deposit or conversion and include at least one of the following situations:
    • You are at least age 59 ½.
    • The distribution is being used to make a first-time home purchase for you or a family member. There is a $10,000-lifetime maximum.
    • The distribution is made in connection with your disability.
    • The distribution is made to your beneficiary or estate upon your death.
  • Non-qualified Roth IRA distributions are distributions that don't pass the qualified distribution criteria (especially the five-year rule). These distributions are subject to taxes on earnings and an additional 10% tax unless one of the following exceptions apply:
    • You take distributions as a series of substantially equal payments (if under age 59 ½).
    • You are disabled.
    • The distribution is being used to make a first-time home purchase for you or a family member. There is a $ 10,000-lifetime maximum.
    • The distribution is used to cover unreimbursed medical expenses or health insurance premiums if you are unemployed.
    • The distribution is made to your beneficiary upon your death.
    • The money is used to pay for qualified expenses for higher education.
    • The distribution is a for a qualified reservist distribution.
    • The distribution is due to an IRS levy of the qualified plan.
    • The distribution fulfills the requirements set by Congress for a qualified disaster distribution.

You can always withdraw your contributions without tax or penalty regardless of age or the 5-year rule.

The distribution rules and exceptions can be complicated and detailed.  For more information and details, be sure to check out IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

4. required minimum distributions (rmds)

There are no required minimum distributions on Roth IRA accounts which make them a great estate planning tool.  If the money is not needed for retirement, the account can continue to grow tax-free until the account holder dies.  Upon their death, if the beneficiary is their spouse, they are not subject to RMDs either, and the account can continue to grow tax-free.

Non-spousal beneficiaries will be subject to RMDs. They have two options:

  1. Take the entire balance from the account by December 31 of the year that includes the fifth anniversary of the account owner’s death. As long as the account owner held the Roth IRA for at least five years, the beneficiary will not incur any taxes on the distribution.
  2. Take distributions from the Roth over the beneficiary’s lifetime. If the beneficiary is younger, the money can continue to grow tax-free while taking the lifetime distributions. As long as the five-year rule was satisfied, there are no taxes on the withdrawals. A stretch Roth IRA can be a very powerful wealth-building mechanism for these beneficiaries.

5. roth conversions

An option to consider beyond contributing to a Roth IRA is converting assets held in a traditional IRA account to a Roth IRA. This should be considered as part of your overall strategy for managing withdrawals in retirement.

A Roth conversion will result in paying taxes on the assets being converted in the year the conversion takes place. All pre-tax contributions and account earnings will be subject to taxes as a result of the conversion.

The main appeal of a Roth conversion is the fact that no taxes will be due on qualified distributions in retirement. This offers several potential benefits:

  • Many will find themselves in a higher tax bracket in retirement, this strategy can help reduce that tax hit.
  • The 2017 tax reform rules have resulted in lower tax rates virtually across the board. These lower rates may be temporary, they are scheduled to expire after the 2025 tax year. For many paying these lower rates now will be advantageous.
  • We don’t know where tax rates will go in the future. Converting some pre-tax retirement assets to a Roth account allows for tax diversification in retirement, providing at least some hedge against higher rates.
  • As discussed earlier, assets converted to a Roth will not be subject to RMDs.

6. backdoor roth iras

The backdoor Roth is a strategy for those who’s earnings are above the income limits, but who still want to contribute to a Roth IRA.  At its most basic, the backdoor Roth involves contributing to a traditional IRA account and then converting that contribution to a Roth IRA account.

In the most ideal situation, you will make an after-tax contribution to a traditional IRA account. If you had no other assets in traditional IRA accounts that were originally contributed on a pre-tax basis, you would then immediately do the conversion and pay little or no tax.

However, if you have other pre-tax traditional IRA assets, the conversion could be subject to the pro-rata rule. If you have both pre and post-tax money in your traditional IRA, upon converting a portion of this money to a Roth the amount subject to taxes would be in proportion to the amount of the IRA that consists of pre-tax money.

For example, if you had $93,000 in an IRA all of which was originally contributed on a pre-tax basis, a post-tax contribution of $7,000 would bring your total IRA money to $100,000. If you only wanted to convert the $7,000 contributed for this year, the amount subject to taxes would be 93% of the $7,000 or $6,510. If you wanted to do a conversion of $50,000, the same ratio would apply, in this case $46,500 of the converted amount would be subject to taxes.

Even with the pro-rata rule, a back-door Roth and a conversion might still make sense for you given the current low tax rates.

7. ROTH 401(k)s

Many 401(k) plans now offer a Roth option. It can be a great tool for those whose income precludes a contribution to a Roth IRA and for those who want to contribute more than the $6,000/$7,000 Roth IRA limits in place for 2019.

The 2019 contribution limits for 401(k) plans are $19,000 plus an additional $6,000 catch-up for those who are age 50 and over at any point during the year. You can generally direct all of your salary deferrals to the Roth option if you wish. Note that any company matching will go into the traditional 401(k) under the current rules.

When you leave your employer, you will need to roll the Roth account to a Roth IRA or a Roth 401(k) account with a new employer, if applicable. Likewise, the traditional 401(k) portion will need to be rolled to a traditional IRA or a traditional 401(k) account with a new employer if applicable.


Roth IRAs are great for estate planning, tax diversification, and tax bracket management.

It was mentioned earlier that Roth IRAs can be a great estate planning tool since there are no RMDs.  This allows for the greater accumulation of tax-free wealth which can be passed on to beneficiaries.  This is a huge benefit versus traditional IRAs.

The tax-free distributions also allow for tax diversification for clients.  If a client requires funds and has both traditional and Roth IRAs, a strategy can be put in place on how much to distribute in taxable income versus tax-free income.  If a client has a large unexpected expense, maybe it is best to use tax-free distributions and avoid tax.  Additionally, if a client is near a higher tax bracket but needs funds, tax-free distributions from a Roth IRA will avoid escalating to the next bracket and paying the higher tax rate.  Having Roth IRA assets gives the opportunity for "tax bracket management."


Roth accounts offer a solid retirement planning option and may benefit many people in a variety of situations. However, they are not “one size fits all.”

We recommend consulting with your financial advisor and tax accountant when determining if a Roth account is right for you because each person’s situation is unique and the rules are complex.

Give us a call to discuss your retirement planning needs  and to learn more about the potential benefits of a Roth account.


About the Author David M. Smith

David is a Senior Financial Advisor and the firm’s Co-Chief Investment Officer. He has more than 20 years’ experience in the financial services industry and holds the highly respected Certified Investment Management Analyst™ and Certified Financial Planner™ designations; he is a Co-Managing Member of the firm.
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