No one is going to cry for you if you’ve saved too much for retirement, but in this case, maybe they should: Contributions in excess of the annual limit can trigger a penalty from the IRS that could easily wipe out any investment income.But here’s the good news: You’re allowed to backtrack.
That means that if your taxable income is ,000, your cap on Roth IRA contributions is also ,000.
If you don’t have any taxable earnings during the year, you can’t contribute.
If you withdraw before the official retirement age (59 ½), you will also have to pay additional penalties unless you can prove extenuating circumstances (like spouse death, hardship, disability and qualified medical expenses).
All withdrawals from a Traditional IRA (except for amounts attributable to nondeductible contributions) are generally taxed as ordinary income – a key difference to Roth IRA’s.
In addition, you’re never required to take distributions, making a Roth IRA an effective option for both retirement and estate planning purposes.
Further, you may realize tax savings if you think your tax bracket in retirement will be higher than your current rate.
(Single and have Employer Plan) - ,000 to ,000 (Married and have Employer Plan) - ,000 to 9,000 (Married Filing Separately and have Employer Plan) -
Unlike the traditional IRA though, once you reach age 59½, you may qualify for tax-free withdrawals of both contributions and any accumulated earnings.
A five-year holding period required for tax-free withdrawals regardless of investor’s age.
The Roth IRA is subject to penalties if withdrawn early, but up to ,000 in earnings may be withdrawn tax-free if used for a qualified first-time home purchase.
Assuming you follow the Roth IRA withdrawal rules — and you should — you won’t pay taxes on any investment growth.