Roth IRA💸
literally everything you need to know about this account...
You’ve probably heard of Roth IRA. In this email, I’ll cover the basics of a Roth IRA, contribution rules, and how Roth IRA withdrawals actually work.
Roth IRA is a retirement account where your contributions (the money you put into the account) and earnings (growth of your investments) grow tax-free. You can withdraw your investments tax-free and penalty-free after reaching age 59 ½ and once your account has been open for 5 years.
Your contributions can always (!) be withdrawn tax-free and penalty-free at ANY time.
For example, let’s say you contributed $5,500 to a Roth IRA account in 2015. Now, the account balance is $20,000. You can withdraw that initial $5,500 without ANY penalties. To do this, you would need to sell stocks/ETFs totaling $5,500 and then withdraw the funds to your bank. There’s a common misconception that your money is always locked in, but you can always withdraw what you put in.
However, withdrawals become more complicated once you start dealing with earnings, conversions, or Backdoor Roth.
There are basically 4 distinct scenarios that determine whether you need to pay any penalty (10%) and tax on Roth IRA withdrawals:
1. You are over 59 ½ years old and 5 years or more elapsed since opening your first Roth IRA
If this is the case, ALL your money, regardless of where it came from (direct contribution to Roth IRA, Roth 401k conversion, Backdoor Roth conversion, Mega Backdoor Roth conversion, earnings), can be withdrawn tax-free and penalty-free from a Roth IRA.
2. You are over 59 ½ years and 5 years have not elapsed since opening your first Roth IRA
If this is the case, you can withdraw all your direct contributions and conversions (e.g. Backdoor Roth) tax and penalty free. Earnings, or growth, associated with your contributions or conversions will be subject to tax, but without a 10% penalty.
3. You are under 59 ½ years and 5 year conversion holding period was met
If this is the case, you can withdraw all your direct contributions and conversions (e.g., Backdoor Roth) tax and penalty-free. Earnings (i.e., growth) will be subject to tax AND a 10% penalty.
4. You are under 59 ½ years and 5 year conversion holding was not met (for Backdoor Roth or Roth conversions)
If this is the case, you can withdraw all your direct contributions tax and penalty-free. The taxable portion of the conversion will be subject to a 10% penalty. Earnings (i.e., growth) will be subject to tax AND a 10% penalty.
How to qualify?
There is an income limit to qualify. For the 2026 year, if your Modified Adjusted Gross Income (AGI (line 11 of 1040) plus student loan interest) is less than $153,000 (single) or $242,000 (married filing jointly), you can contribute the full amount.
If your income is more than that, you can always use the Backdoor Roth strategy.
How much can you contribute?
The limit to contribute to a Roth IRA in 2026 is the lesser of:
$7,500 ($8,600 if you are age 50 or older), or
Your taxable compensation (includes wages, salaries, bonuses, self-employment income)
Therefore, if you took a year off and didn’t have any taxable compensation, you will not be able to contribute to a Roth IRA.
When can you contribute?
You can make contributions to a Roth IRA at any time during that year or by the due date of your tax return for that year (excluding extensions). So, contributions for the year 2026 will be due by April 15, 2027.
What if you contribute too much?
Generally, your broker wouldn’t allow you to contribute more than the limit, but sometimes mistakes can happen (for example, having a Roth IRA with two different brokers like Vanguard and Fidelity). An excise tax of 6% applies to any excess contributions made to a Roth IRA. However, per the IRS, “any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed.”
Why contribute?
Aside from tax-free growth and withdrawals after age 59½, a Roth IRA offers some additional benefits:
• Tax rate protection
• Lack of increased medicare premiums (IRMAA)
• No Required Minimum Distribution (RMD)
It’s important to keep ALL records related to your IRAs. Have a spreadsheet that tracks your contributions, withdrawals, dates, any conversions, and all your forms that you receive related to Roth IRA (1099-R, 5498). It will help you in case of an audit or for tracking purposes.
Hope you found this one helpful.
Let me know if there are any questions.
MC, CPA