The TCJA did not change anything of note for Roth IRAs, except the new rule does not allow for Roth conversion reversals.
Two advantages of a Roth IRA over a Tradiotional IRA is tax free withdrawals and they are exempt from required minimum distributions (RMD.)
Tax-Free Withdrawals
To be exempt from Federal Income Taxes , the following requirements must be met:
- Has a Roth IRA open for 5 years or longer (calculated a January 1st of 1st year the account was opened and remained open)
- Have reached age 59.5, is disabled or dead
Not Required to Take RMDs
If you are the original owner of the Roth account, you do not have to take required minimum distributions starting at age 70.5.
If you leave to your heirs, they will need to follow the RMD rules that apply to inherited IRAs (must start taking required minimum distributions the year following death, even if under 59.5.) The heir will need to take distributions over their life expectancy.
When Making Annual Roth Contributions Make Sense
If you believe you will have a higher or the same tax bracket in retirement as you do now, contributing to a Roth IRA is a fiscally smart move. Me personally, I expect to be in a lower bracket, so I have not converted and still make contributions to a tradiotional IRA.
***Remember, you do not get an AGI deduction for Roth contributions and the annual contribution limit is the same as traditional IRAs.***
Another reason to contribute is if your income (MAGI) is too high ($121,000 at the time of this post) to gain benefit for contributing to an IRA.
You can also contribute if you are over 70.5 years of age.
The maximum you can contribute in any year is your earned income for the year, up to the maximum annual contribution amount of $5,500 ($6,500 if over 50) in 2018.
Earned income is wages, earning from self-employment and alimony received.
How to Calculate MAGI
- Start with AGI
- Add traditional IRA contribution deductions
- Add tuition and fees deduction
- Add student loan interest deduction
- Add US Savings Bond interest used to pay higher education costs
- Add IRC Section 137 tax free employer adoption assistance payments
- Add deduction for domestic production activities
- Add tax free foreign income and housing allowances
Income Limits
If you are single, the phase out for eligibility to contribute starts at MAGI of $120,000 and is completely phased out at $135,000 in 2018. For those filing Married Filing Jointly, the range is $189,000 to $199,000. If MFS, it’s phased out completely at $10,000.
The deadline to make a contribution is April 15th following year end.
Roth Conversions
When you convert from a tradional IRA to a Roth, the conversion is deemed taxable income. The tax rates for 2018 are: 2018 Tax Rates
If you are converting a large amount, consider a multi-year conversion.
Under the new law, you can no longer reverse a conversion by October 15th, the conversion is permanent.
If you have any questions, please comment below.
