Introduction to Roth IRAs

Introduction to Roth IRAs

A Roth individual retirement account (IRA) is a retirement savings option for clients looking for potentially greater tax savings than a traditional IRA. Contributions can be made at any age and are made post-tax. Earnings grow tax-free, and qualified withdrawals and distributions are free of federal income tax if certain requirements are met. Roth IRAs do not have required minimum distributions (RMDs), and qualified distributions are tax-free, after a five-year holding period and after age 59½.

A Roth IRA can be contributory, rollover, or spousal, and it can be funded from your own earned income Tooltip , through conversions of traditional IRAs or qualified retirement plans (QRPs), through a rollover of Roth contributions to a 401(k) or QRP, or through a rollover from a Roth 401(k). Contact your tax advisor regarding any tax implications of conversion.

Key information related to a Roth IRA:

Deadlines
  • Establish a Roth IRA: April 15 of the following year for which the contributions are meant
  • Contribute to a Roth IRA: April 15 of the following year
  • Convert to a Roth IRA: December 31
Contributions
  • Contribution limits apply
  • Contributions must be from earned income.
  • Regular contributions must be in cash or cash equivalents.
Tax Ramifications
  • Contributions are not tax-deductible.
  • Earnings grow tax-free.
  • Withdrawal of contributions is tax-free.
  • Withdrawal of earnings is tax-free if account has been open more than five years and withdrawal is due to:
    • Reaching age 59½ or older
    • Certain first-time home purchases
    • Disability or death
  • Current vs. future tax brackets are a consideration in determining if a Roth conversion is right for your client. 
  • With a Roth IRA, you eliminate the income tax on qualified distributions the account holder’s heirs would otherwise have to pay on withdrawals from an inherited traditional IRA.
  • All non-spouse beneficiaries must take RMDs once the Roth account is inherited. A spousal beneficiary may delay RMDs until the date the decedent would have reached their RMD age, or they can treat the Roth IRA as their own and begin taking RMD once they reach their RMD age.

For information regarding income limitations, withdrawal penalties, distribution requirements, and more, refer to the following table:

Income Limitations Modified Adjusted Gross Income (MAGI) for tax year 2024 limited to:
  • Single: < $146,000 can contribute full amount;
    $146,000 - $161,000 can contribute partially;
    > $161,000 cannot contribute
  • Married filing jointly: < $230,000 can contribute full amount; $230,000 - $240,000 can contribute partially; > $240,000 cannot contribute
  • Married Filing Separately: < $10,000 can contribute partially; >$10,000 cannot contribute 
Rollovers/Conversions
  •  All investors may convert a traditional, SIMPLE IRA, SEP-IRA or SAR-SEP IRA to a Roth IRA regardless of income or tax filing status (considered a taxable event).
  • Traditional IRAs, Rollover IRAs, and SEP IRAs can be converted at any time. However, SIMPLE IRAs must be open for a two-year holding period before they can be converted to a Roth.
  • A qualified plan (such as a 401(k) or QRP) may be rolled over to a traditional IRA or converted to a Roth IRA.
  • All investors are eligible to convert to a Roth IRA.
  • The Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize (reverse) a Roth conversion after December 31, 2017.
  • There is no deadline for converting. The converted amount is reported on IRS form 1099R in the tax year it occurred.
Withdrawals Withdrawals of earnings are income-tax-free if the account holder is at least 59½ and has had the account for at least five years (minimum holding period). Unlike traditional 401(k)s and IRAs, Roth IRAs don't require the account holder to take minimum distributions starting at their RMD age. However, if converting to a Roth IRA after their RMD age, they still must take one final RMD from their traditional retirement account for the conversion year.

With a Roth IRA, the account holder may be able to take an early distribution on an exception basis without paying the early distribution penalty. Early distribution exceptions include but are not limited to:
  • Qualified higher education expenses
  • First-time home purchases
  • Qualified medical expenses
  • Qualified disability claims
Withdrawal Penalties
  • A 10% penalty on distributions of earnings if withdrawn before age 59½ or before the account has been opened at least five years
  • A 10% penalty on distribution of converted assets that were not in the account at least five years and are withdrawn before the age 59½
Distributions
  • Not subject to RMDs
  • Account holders can take qualified early distributions without paying an early distribution penalty.
  • Qualified early distributions include, but are not limited to:
    • Qualified higher-education expenses
    • First-time home purchases
    • Qualified medical expenses
    • Qualified disability claims
Account Protection Schwab offers protection for cash assets in Schwab One® accounts.
Householding Schwab automatically groups qualified accounts of individuals with the same last name at the same home address into a household.

To determine contribution limits for Roth IRAs, consult a tax advisor.

For comparison of the two main types of individual retirement accounts, see IRA Comparisons.

What happens if my clients have a Roth IRA, but one year their income exceeds the limit for contributing?
For any year in which your client’s income exceeds the contribution limit, they can't contribute to their Roth IRA. If their income dips in a subsequent year into the income range, they can resume their Roth contributions. Keep in mind that the IRS removed the income limits for conversion, starting in 2010, expanding the eligibility for individuals to convert to a Roth IRA (restrictions may apply in certain states).

If your clients have a non-Roth retirement account, they may want to consider conversion if they can't contribute. Of course, they can also consider increasing contributions to their non-Roth retirement accounts. For assistance, have your clients talk to with a tax professional.

My client contributed too much money to their Roth IRA. What can they do if the tax-year deadline has passed?
Your clients can remove the extra money after the tax-filing deadline, including extensions, but they'll be charged a 6% penalty. Note: The IRS hasn't addressed the issue regarding whether earnings must be removed after the tax-filing deadline for excess Roth IRA contributions. Have your clients check with a tax professional to determine the best solution for their individual situation.

Can my client contribute to a Roth IRA and a traditional IRA in the same year?
Yes, however, the total contribution cannot exceed the annual contribution limit (including catch-up contributions). If your client is ineligible to make the full contribution to the Roth due to the client's modified adjusted gross income (MAGI), the remaining amount may be contributed to the traditional IRA. Deductibility rules would apply to the traditional IRA.

Can a Roth contribution or conversion be recharacterized back to the traditional IRA?
A taxpayer may for various reasons decide to redesignate their Roth IRA contribution as a traditional IRA contribution. The Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacterize (reverse) a Roth conversion after 12/31/17. Clients should consult with their tax advisor.

What are the chances that the tax-free nature of a Roth IRA will be revoked?
At this time there is no indication that the Roth IRA's tax-free nature will be eliminated. Of course, tax law is subject to change, so a key part of any decision to contribute or convert to a Roth IRA is what your clients expect their current and future income tax rates to be. Keep in mind their future income tax rate does not simply depend on their expected level of future taxable income, which is difficult to project. It also depends on the tax brackets that may or may not be in place far into the future, and whether our current overall tax system will continue to remain in place (e.g., graduated tax rates vs. flat tax).

What are the exceptions for taking a penalty-free distribution from a Roth IRA?
Taxpayers may be eligible to file for a penalty waiver on premature distributions. The exceptions are:

  • First-time qualified home purchase ($10,000 lifetime limit)
  • Qualified higher education expenses
  • Death or disability
  • Certain medical expenses, including qualifying health insurance costs for certain unemployed individuals and reimbursed expenses exceeding 7.5% of AGI
  • Substantial equal periodic payments
  • A qualified birth or adoption distribution 
  • Qualified reservists' distributions

Qualification for exceptions is made by the IRS; Schwab does not attest to the client qualifying for an exception. If in doubt, consult a tax advisor.

What is the procedure when an IRA account holder dies?
If the IRA account holder dies, Schwab requires a death certificate, and other documentation. For detailed information, see How to handle deceased clients’ assets or Introduction to inherited IRAs.

When the account holder dies, will the beneficiaries of the Roth have to pay income taxes when they take withdrawals?
Possibly. Your client paid the income taxes up front on their contributions or when they converted, so the beneficiaries will only incur income tax on the earnings if withdrawn prior to the 5-year holding period being met. That holding period started with the original account holder. Also, the Roth IRA balance is included in your client’s taxable estate for estate tax purposes just as a traditional IRA would be.

Can an account holder roll over funds from a Roth IRA to another IRA type?
No. Rollovers are not allowed to or from Roth IRAs except from another Roth IRA, and those are permitted only once per 12 consecutive months, regardless of the number of IRAs owned. A movement of assets from a traditional IRA to a Roth IRA is a conversion, rather than a rollover.

Can direct rollovers be made to a Roth IRA from a qualified plan, tax-deferred annuity, or government 457 plan?
Yes. After tax amount from these plans may be directly rolled to a Roth IRA.

The following are available to assist you:

How to add features to an account
How to convert accounts
How to handle deceased clients’ assets
How to open a custodial IRA
How to open an inherited IRA
How to open an IRA for international clients/residents
How to open a Roth IRA
How to open a traditional IRA
How to request a retirement distribution
How to roll over assets to a Schwab account
Introduction to cash options and investments
Introduction to custodial IRAs
Introduction to householding
Introduction to required minimum distributions (RMDs)
Introduction to traditional IRAs

To select a form, go to the Forms library on Schwab Advisor Center.

Visit the IRA Analyzer to determine contribution limits for your clients’ Traditional IRAs and Roth IRAs.

Leverage the Roth IRA Conversion Calculator to help you determine if converting to a Roth IRA would benefit your clients.

Refer to the following resources to manage your client’s Roth IRA:
Understanding Your Required Minimum Distribution Guide
Roth Conversion FAQs

For more information, see:
Schwab IRA and ESA Account Agreement
Account Agreement Amendments
Charles Schwab Pricing Guide
Cash Features Disclosure Statement