A Roth IRA is an individual retirement savings account where the owner can contribute towards using after-tax dollars. Income tax is paid on the initial contribution. This means that all earnings grow at a tax-free rate, and upon retirement, all distributions are withdrawn tax-free.

With a self-directed Roth IRA, the owner of the IRA can diversify outside of the traditional portfolio of stocks, bonds, and mutual funds. Self-directed account owners can use their saved retirement funds to invest in alternative assets. Roth IRA alternative investments include real estate, private equity, precious metals and so much more.


Contribution Limits

The annual contribution limit is $6,000 for savers under the age of 50 for 2021 and 2022. But if the account holder is over the age of 50, they can contribute an extra $1,000, $7,000 in total contributions annually. This contribution limit applies across all IRA accounts. So, if the same individual owns multiple IRAs, then the annual limit is spread across all IRAs.


Tax Benefits

There are a few significant tax benefits to a Roth IRA. First, you are taxed on the contribution of funds. The benefit to that is all funds and any increase will grow at a tax-deferred rate and are withdrawn at a tax-free. Second, you can leave your funds untouched for as long as you desire. With a traditional IRA, you are required to start taking distributions. Lastly, you can take distributions out penalty-free at any time as long as you follow the qualifying reasons listed below under distributions.


Taking Distributions

To distribute investment earnings without owing income taxes and a 10% penalty, you will first have to meet specific criteria. Meet one of the following:

  • IRA holder has completed age 59 ½
  • Death or disability of the account holder
  • Or, the account holder is a first-time homebuyer (maximum withdrawal of $10,000)
  • Lastly, the amount distributed from the IRA must have been in the same account for at least five years

If you are under the age of 59 ½ and are not following any of the following criteria above then your account is subject to a 10% penalty.


Calculating Your Modified Adjusted Gross Income

In order for a Roth account owner to contribute to their Roth IRA, their income must first not exceed the federally set income limits. If your income is within limits, you must calculate your MAGI to get your annual contribution amount. If your MAGI surpasses the allowed limits, then your Roth contributions are phased out.

Retirement savers within the phase-out range will subtract their income from the maximum level and divide that amount by the phase-out range. This is how you determine the percentage of the annual $6,000 limit they will contribute.

Roth IRA income limits for 2021 and 2022:

If your filing status is
And your modified AGI is
You can contribute
Married filing jointly or qualifying widow(er)
Less than $198,000
Up to the limit
More than $198,000 but less than $208,000
A reduced amount
$208,000 or more
Zero
Single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year
Less than $125,000
Up to the limit
More than $125,000 but less than $140,000
A reduced amount
$140,000 or more
Zero
Married filing separately and you lived with your spouse at any time during the year
Less than $10,000
A reduced amount
$10,000 or more
Zero

Roth IRA income limits for 2020:

If your filing status is
And your modified AGI is
You can contribute
Married filing jointly or qualifying widow(er)
Less than $196,000
Up to the limit
More than $196,000 but less than $206,000
A reduced amount
$206,000 or more
Zero
Single, head of household, or married filing separately and you didn’t live with your spouse at any time during the year
Less than $124,000
Up to the limit
More than $124,000 but less than $139,000
A reduced amount
$139,000 or more
Zero
Married filing separately and you lived with your spouse at any time during the year
Less than $10,000
A reduced amount
$10,000 or more
Zero

If anyone contributes more than is allowed by federal law have to subsequently withdraw the excess contributions. Tax penalties will be issued to the offending account if not remedied. The excess contributions will be taxed at a 6% rate per year that they remain in the IRA.


How Does Accuplan Improve the Roth IRA?  

Accuplan allows you to do more with a Roth IRA. Most retirement accounts, be it a Roth, Traditional, or 401k, rely on stocks and bonds as the investment option. The IRS allows many more asset types than simply stocks and bonds. 

 
With Accuplan Benefits Services, you can open a self-directed Roth IRA and invest in tangible assets like real estate or gold or paper assets like private equity or loans. A self-directed retirement account allows you to take control of your retirement account and invest in what you want. With Accuplan, the possibilities are endless. 

To learn about Traditional IRAs Click Here

Frequently Asked Questions

Anyone can set up and make contributions to a Roth IRA if the following eligibility requirements are met:

  • The account owner has received a taxable salary or wage over the calendar year.
  • The modified adjusted gross income of the account holder does not exceed the IRS mandated Roth IRA income limits.

The short answer is it depends. Depending on your MAGI (modified adjusted gross income), you may not be eligible to contribute to a Roth.

If your MAGI is below the limits decided by the IRS and you have earned income in the contribution year, you may put money into both a 401k and Roth IRA. All contribution limits remain the same as mentioned above.

Your MAGI will determine many different benefits that you may receive. Still, for retirement accounts, it determines if you are eligible to contribute to a Roth and if you can deduct your traditional IRA contributions.

To calculate your MAGI, you’ll first calculate your AGI (adjusted gross income). Then you’ll add any deductions back specified by the IRS, which, more times than not, is irrelevant, and you won’t need to add any back. MAGI is always the same or greater than your AGI.

The main difference between the two account types is when taxes are paid. Roth IRA contributions and investments are taxed immediately, and Traditional IRAs delay taxes until taking distributions.

Roth IRA owners pay taxes upon contributing to the IRA but receive no tax break benefits. They do however receive the benefit of paying zero taxes on their IRA funds when retired.

Traditional IRAs are almost exactly the inverse, no taxes are paid while contributing to the IRA, and contributions can be fully or partially tax-deductible. Taxes for Traditional IRAs are then taxed upon retirement when distributions are withdrawn.

There is no right or wrong account type, both provide the account owner different benefits that they can utilize to their extent.