Roth IRA Rules and Contribution Limits 2021

Advertising Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services

A Roth IRA is a type of retirement-focused investment account that lets you withdraw your earnings without paying a tax penalty. But there are specific rules you must follow for making contributions and withdrawing funds.

While Roth IRAs are handy accounts, they may not be the best retirement account for you. Let's dive in and see what a Roth IRA is all about.

Who Can Open a Roth IRA?

A Roth IRA can be opened by anyone who is at least 18 years old and has earned income. “Earned income” means money that you can prove to the government that you earned, like a job at your local grocery store. It doesn't usually mean money earned “under the table” (off the record), like the kind you make babysitting.

If you don't have earned income but want to open a Roth IRA at 18, you can open one with an adult who does have earned income. For example, parents who work can open a Roth IRA with their child. The brokerage will use the employment history of the parents to open the account, but the child will have full access to the account and funds.

IRAs are designed to be available to many people. Many retirement accounts are linked to employment (like a workplace-sponsored 401(k)), but IRAs are not. The Roth IRA eligibility is purposely broad.

What Are the Contribution Rules?

For 2020, the maximum amount of money a person can contribute to their Roth IRA is $6,000. This remains unchanged from 2019, although the IRS does change the contribution limit every few years. (This is to keep up with inflation.)

If you are 50 years old or older, you can contribute an additional $1,000, making your total annual contribution of $7,000. This exception is designed for older people who got a late start with investing. But people who simply want to pad their retirement accounts before leaving the workforce permanently can also contribute this maximum.

There are income limits for Roth IRAs. If you make over a certain amount of money, you are no longer eligible to fund this account. These income limits are based on your tax status and your adjusted gross income.

For 2020, single filers with modified adjusted gross incomes (AGI) below $139,000 can contribute to a Roth IRA. A single filer with an AGI above $139,000 cannot contribute to a Roth. And a single filer who earns between $124,000 and $139,000 can contribute only a reduced amount.

For those who are married and filing taxes jointly, the income limit is $206,000. And the contribution amount is reduced between $196,000 and $206,000.

We've broken down the 2020 contribution rules into three tables.

Single or Head of Household

Modified Adjusted Gross IncomeMaximum Annual Contribution
Less than $124,000$6,000 ($7,000 for age 50+)
$124,000-138,999Reduced contribution
$139,000 and upNo allowed contribution

Married Filing Jointly or Qualifying Widow(er)

Modified Adjusted Gross IncomeMaximum Annual Contribution
Less than $196,000$6,000 ($7,000 for age 50+)
$196,000-$205,999Reduced contribution
$206,000 and upNo allowed contribution

Married Filing Separately*

Modified Adjusted Gross IncomeMaximum Annual Contribution
Less than $10,000Reduced contribution
$10,000 and upNo allowed contribution
*Note that this applies to those who file separately but have lived with their spouse at any time during the year. If you are filing separately but did not live together, the limits for the Single person apply.

What Are the Withdrawal Rules?

You can withdraw the money that you contribute to a Roth IRA at any point. Say you contribute $4,000 to a Roth in 2020 and the market earns you $500. You can take out the $4,000 at any time without having to pay any taxes, penalties or fees. The government allows this because you've already paid tax on your contributions.

If you want to take out the $500 of market returns (your earnings), you can also do that, but it may come with fees and taxes. If you've had the account for over five years and one of the four following scenarios exists, you're exempt from fees and taxes when the market earnings are withdrawn:

  • You are 59½ years old or older
  • You withdraw up to $10,000 for a first-time home purchase
  • You've become disabled
  • You pass away and your inheritor is withdrawing the money

If you want to withdraw your market earnings from your Roth for any other reason, you will pay a 10% tax rate as a penalty, on top of your current tax rate. Try to avoid taking money out of your IRA, because these taxes and fees can add up. Plus, if you take money out of the market, you lose your chance for further market growth.

Now, when it comes to regular withdrawals (not early ones), there are no required minimum distributions like there are for traditional IRAs and 401(k) accounts. You can leave the money in your Roth IRA once you reach retirement age. This means your money can keep growing in the market.

Roth IRA FAQ

How Do Taxes Play Into This?

You pay tax on your Roth IRA contributions in the year you make them. In retirement, you do not have to pay tax on the money you withdraw from the account.

Can I Have Both a Roth and a Traditional IRA?

Yes, you can have both a Roth and a traditional IRA and contribute to both accounts in the same year. However, you must make sure that your combined contribution doesn't exceed the maximum of $6,000 (or $7,000 if you're older than 50.

Can I Have Both a Roth IRA and a 401(k)?

Of course! You contribute up to the maximum in each type of plan.

What If My Income Is Too High for a Roth IRA?

Lucky for you, there's a trick you can use that can let you legally still invest in a Roth IRA. It's called the “backdoor” method.

Is a Roth Right for Me?

A Roth IRA is generally best for people who are in lower income tax brackets during their earning years and expect to be in a higher tax bracket in their retirement years. Since you pay taxes upfront, the idea is to pay the taxes while you are in the lowest possible tax bracket.

A Roth is also a good idea for people who don’t have access to a retirement plan through work. Only 50% of Americans have access to a 401(k) plan. A Roth is a great way to jumpstart your retirement savings, especially if you start investing at a young age.

Since the Roth IRA rules around withdrawals are more forgiving than other retirement accounts (for both early and regular withdrawals), a Roth can also act as an absolute last-ditch emergency fund. Generally. the advice from financial advisors and experts is to never withdraw money from retirement accounts before you need it, and that’s good advice. But if something terrible befalls your finances, it is easier to get money out of a Roth IRA than other accounts.

Kara Perez

Kara Perez is a freelance personal finance writer. She is the founder of bravelygo.co, a company that connects women and money. Kara lives in Austin, TX and believes in the power of budgeting and peanut butter.

Related Articles

Back to top button