what can you contribute to a roth ira 
the irs dictates not only how much money you can deposit in a roth ira but also the type of money that you can deposit basically you can only contribute earned income to a roth ira 2for individuals working for an employer compensation that is eligible to fund a roth ira includes wages salaries commissions bonuses and other amounts paid to the individual for the services that they perform it s generally any amount shown in box 1 of the individual s form w 2 for a self employed individual or a partner or member of a pass through business compensation is the individual s net earnings from their business less any deduction allowed for contributions made to retirement plans on the individual s behalf and further reduced by 50 of the individual s self employment taxes 1516money related to divorce alimony child support or in a settlement can also be contributed if it is related to taxable alimony received from a divorce settlement executed prior to dec 31 2018 16so what sort of funds aren t eligible the list includes you can never contribute more to your ira than your earned income in that tax year 8 and as previously mentioned you receive no tax deduction for the contribution although you may be able to take a saver s tax credit of 10 20 or 50 of the deposit depending on your income and life situation 18who s eligible for a roth ira anyone who has earned income can contribute to a roth ira as long as they meet certain requirements concerning filing status and modified adjusted gross income magi 2 those whose annual income is above a certain amount which the irs adjusts periodically become ineligible to contribute the chart below shows the figures for 2023 and 2024 8here s how the system works an individual who earns less than the ranges shown for their appropriate category can contribute up to 100 of their compensation or the contribution limit whichever is less 2individuals within the phaseout range must subtract their income from the maximum level and then divide that by the phaseout range to determine the percentage that they are allowed to contribute 19the spousal roth iraone way that a couple can boost their contributions is the spousal roth ira an individual may fund a roth ira on behalf of their married partner who earns little or no income spousal roth ira contributions are subject to the same rules and limits as regular roth ira contributions the spousal roth ira is held separately from the roth ira of the individual making the contribution as roth iras cannot be joint accounts for an individual to be eligible to make a spousal roth ira contribution the following requirements must be met withdrawals qualified distributionsat any time during the tax year you may withdraw contributions from your roth ira both tax and penalty free if you take out only an amount equal to the sum that you ve put in then the distribution is not considered taxable income and is not subject to penalty regardless of your age or how long it has been in the account 21however there s a catch when it comes to withdrawing account earnings any returns that the account has generated for distribution of account earnings to be considered a qualified distribution it must occur at least five years after the roth ira owner established and funded their first roth ira and the distribution must occur under at least one of the following conditions the five year rulewithdrawal of earnings may be subject to taxes and or a 10 penalty depending on your age and whether you ve met the five year rule here s a quick rundown if you meet the five year rule if you don t meet the five year rule roth ira withdrawals are made on a first in first out fifo basis so any withdrawals made come from contributions first therefore no earnings are considered touched until all contributions have been taken out 24withdrawals non qualified distributionsa withdrawal of earnings that do not meet the above requirements is considered a non qualified distribution and may be subject to income tax or a 10 early distribution penalty 24 there may be exceptions however if the funds are used note that if you withdraw only the amount of your contributions made within the current tax year including any earnings on those contributions then the contribution is reversed for example if you contribute 5 000 in the current year and those funds generate 500 in earnings you can withdraw the 5 000 principal tax and penalty free and the 500 gain will be treated as taxable income 21a special provision in the coronavirus aid relief and economic security cares act allowed taxpayers to take a coronavirus related distribution from jan 1 2020 to dec 31 2020 up to an aggregate 100 000 from all qualified plans and iras the coronavirus related distribution could be taken by a qualified individual defined by the irs as someone who was negatively affected by coronavirus either financially or through a family diagnosis retirement plan owners who qualified for coronavirus related distributions included those the special provision allowed the retirement account holder to take the distribution as a standard withdrawal with no repayment or as a loan with a repayment option the distribution was exempt from the 10 early distribution penalty but was taxed as ordinary income the cares act allowed the withdrawal to be taxed as ordinary income in full in 2020 or over a three year period in 2020 2021 and 2022 those who took advantage of this provision had until the end of the third year to pay back the funds 26for example let s assume that you withdrew 15 000 in 2020 you would need to claim 5 000 on your tax returns in 2020 and 2021 if you repaid the funds in full in 2022 then you would not have needed to pay taxes on the final 5 000 additionally you will need to file an amended return for 2020 and 2021 to recoup your taxes previously paid on the first two thirds roth ira vs traditional irawhether a roth ira is more beneficial than a traditional ira depends on the tax bracket of the filer the expected tax rate at retirement and personal preference individuals who expect to be in a higher tax bracket once they retire may find the roth ira more advantageous since the total tax avoided in retirement will be greater than the income tax paid in the present therefore younger and lower income workers may benefit the most from a roth ira 27indeed by beginning to save with an ira early in life investors make the most of the snowballing effect of compound interest your investment and its earnings are reinvested and generate more earnings which are reinvested and so on of course even if you expect to have a lower tax rate in retirement you ll still enjoy a tax free income stream from your roth ira that s not the worst idea in the world those who don t need their roth ira assets in retirement can leave the money to accrue indefinitely and pass the assets to heirs tax free upon death even better while the beneficiary must take distributions from an inherited ira they can stretch out tax deferral by taking distributions for a decade and in some specialized cases for their lifetimes traditional ira beneficiaries on the other hand do pay taxes on the distributions also a spouse can roll over an inherited ira into a new account and not have to begin taking distributions until age 73 4some open or convert to roth iras because they fear an increase in taxes in the future and this account allows them to lock in the current tax rates on the balance of their conversions executives and other highly compensated employees who are able to contribute to a roth retirement plan through their employers for example via a roth 401 k can also roll these plans into roth iras with no tax consequence and then escape having to take mandatory minimum distributions when they turn 73 