You contribute to a Roth with after-tax money. That’s different from traditional IRAs and 401(k)s, which you fund with pre-tax money. In return, you get unique flexibility and tax advantages.

Jacklin Youssef
Jacklin Youssef

“A Roth offers tax diversification,” says Jacklin Youssef, a senior tax and wealth planning specialist in Vanguard Personal Advisor Services®. “Contributing to a Roth might increase your taxable income right now, but it will provide tax efficiency over the long term.”

A Roth offers 3 key benefits.

1. You may never have to pay taxes on earnings

Want tax-free income? If you follow the rules for qualified withdrawals, that’s what you get with a Roth.*

When you invest in a Roth, you use after-tax money. Instead of getting a tax break upfront, you get it on the back end. When you take qualified withdrawals, you don’t pay taxes on them. That means any earnings you’ve made over the years are tax-free.

Qualified withdrawals must be taken:

  • When you’re age 59½ or older, and
  • At least 5 years after you made your first contribution.

The Roth tax benefit is the opposite of the one traditional IRAs and 401(k)s offer. In those accounts, you get the tax benefit up front. When you take withdrawals, you have to pay income taxes on the full amount, including contributions and earnings.

2. You don’t have to take required minimum distributions (RMDs)

There’s another benefit to a Roth for those already in retirement. Roth IRAs aren’t subject to RMDs.

When you turn 70½, the IRS forces you to withdraw a certain dollar amount from your tax-deferred, or traditional, retirement accounts every year. These RMDs can push your income into a higher tax bracket. They can even affect your Medicare premiums.

With a Roth IRA, you can leave the money in your account where it can continue to grow as long as you want.

3. You may be able to get your money back

Have you ever hesitated to lock up too much of your cash in retirement accounts? Concerned that if you withdraw the money before age 59½, you could face hefty taxes and penalties? A Roth might ease your fears.

In a Roth, the IRS treats contributions and earnings differently.

You can withdraw Roth contributions at any time. You already paid taxes on those funds, so you don’t have to pay them again.

However, the IRS will likely hit you with income tax and penalties if you dip into the earnings early. There are specific exceptions that allow early withdrawals. Those include buying a first home or becoming disabled.

The catch: You might not be able to contribute to a Roth

There’s one downside. If your income is too high, you might not be eligible to make contributions. However, you can still consider a Roth conversion— including a “backdoor” Roth IRA.

The limits are based on your modified adjusted gross income.

Filing status

You can invest the maximum amount if your income is below:

You can make a partial contribution if your income is:

Single or head of household

$118,000 (2017)

$120,000 (2018)

$118,000–$133,000 (2017)

$120,000–$135,000 (2018)

Married filing jointly or a qualified widow(er)

$186,000 (2017)

$189,000 (2018)

$186,000–$196,000 (2017)

$189,000–$199,000 (2018)

Married filing separately

You can’t invest the maximum amount. However, you can use the limits for single people if you haven’t lived with your spouse in the past year.

$0–$10,000. You can use the limits for single people if you haven’t lived with your spouse in the past year.

Eligible to invest?

Maximum contributions are $5,500 in both 2017 and 2018. If you’re age 50 or older, you can contribute an additional $1,000. Consider maximizing your 2017 Roth contribution before the tax-filing deadline, which is April 18, 2018.

*Withdrawals from a Roth IRA are tax-free if you’re at or over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% penalty, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

You may wish to consult a tax advisor about your situation.

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax (unless an exception applies).

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.