Roth IRA Rules for 2021

Roth IRA Rules for 2021

December 16, 2020
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Here are some Roth IRA Rules you need to know for 2021.

You can contribute up to $6,000 if you are under the age of 50 and can contribute an extra $1000 ($7000 total) if you are 50 or older!  This is the same rule as 2020 & 2021.

You cannot contribute to a Roth IRA if your income is over a certain threshold. If you have questions on this, please give our office a call and we can discuss.

But you can get around these income limit thresholds with a backdoor Roth IRA. This is where you fund a traditional IRA then convert it to a Roth IRA. It is a complicated process and can have tax consequences so we would advise consulting with your financial advisor first.

Did you know there is a penalty for contributing too much into your Roth IRA? For every year the extra money you contributed remains in your account, you’ll pay a 6% penalty.

You can also access your contributions you put into your Roth IRA at any time. Since you have already been taxed on your contributions to your Roth IRA, that money is yours any time. We suggest letting leaving all the money in your account and let it grow bigger and bigger.

You can also be penalized if you touch your earnings on your Roth IRA before the age of 59 ½. Remember, this is your earnings on your account, not your contributions.  If you touch your earnings, you will typically owe income taxes plus a 10% penalty. There is also the Five-Year Rule. The account needs to be open for at least 5 years before you can withdraw your earning without paying those taxes and the 10% penalty.

There are some exceptions if you have not had the account open for at least five years such as up to $10,000 for a first-time home or to pay for higher education for yourself, spouse, child or grandchild. Also, health insurance premiums if you become unemployed.

With a Roth IRA, you can keep contributing to your account as long as you have taxable income. This can be a salary, hourly wages, bonuses, or tips.

Lastly, you never have to withdraw money at a certain age. You can keep saving money or you can pass it on to your heirs tax-free when you die.

Have we convinced you to fully fund your Roth IRA or open one? The deadline for funding a Roth IRA for any calendar year is Tax Day of the following year.

As always, give our office a call with any questions!

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  (12/20)