Everything You Need to Know About Roth IRAs

For most savers, the contribution caps will be the same in 2025: $7,000 up to age 50, $8,000 for the 50-plus. However, starting next year, there’s a higher limit for people ages 60 to 63, under a provision of the SECURE 2.0 Act designed to promote greater saving by those nearing retirement. In 2025, this so-called super catch-up can be up to $11,250.

Gilbert recommends maxing out your Roth IRA each year if possible. The reason? “Mathematically, a Roth IRA will always be more beneficial than a pretax IRA if taxes remain the same or go up in the future,” he says. “And most everyone agrees that taxes are going up in the future.”

There’s one catch. How much you can contribute to a Roth IRA may be reduced or phased out to zero dollars, depending on your modified adjusted gross income, or MAGI in IRS parlance. MAGI is your adjusted gross income on your 1040 or 1040-SR tax form, minus certain deductions, such as student loan interest.

In general, married couples filing jointly can contribute the Roth IRA maximum in 2024 if their MAGI is less than $230,000. Higher earners will be able to contribute either a reduced amount or nothing at all. The MAGI cutoff to contribute the maximum to a Roth IRA if you are single or filing as a head of household in 2024 is $146,000. The thresholds go up to $236,000 for a couple and $150,000 for an individual in 2025.

Withdrawals

You may make qualified withdrawals (meaning tax-free and penalty-free) from your Roth IRA principal (the money you’ve contributed to the account) at any time. Withdrawals from your account earnings are qualified if you are older than 59½ and have held your Roth IRA for at least five years.

If you are under 59½ and do not meet the five-year test, withdrawals from your earnings could be subject to income taxes as well as a 10 percent IRS penalty. The IRS figures that you’re taking out your principal first, but if you withdraw all your principal, further withdrawals generally are not qualified.

There are some exceptions. For example, you can take penalty-free (but not tax-free) withdrawals from your Roth if you’ve had it less than five years under certain conditions:

• You’re using up to a $10,000 lifetime maximum for the first-time purchase of a home.
• You’re using the withdrawal for qualified education purposes.
• You’re using the withdrawal for qualified expenses related to a birth or adoption.
• You suffer a disability or have a terminal illness.
• You use the withdrawal to pay for unreimbursed medical expenses or, if you’re unemployed, health insurance premiums.
• You will still owe taxes on the earnings you withdraw.

Benefits for heirs

The dual advantages of tax-free withdrawals and no RMDs benefit retirees in additional ways. These perks make it easier and more tax-efficient to leave money to heirs.

“Roth IRAs are a great wealth transfer vehicle for people who are already retired,” Reese says. “In fact, they enable you to transfer wealth tax-free.”

Let’s say you have a granddaughter in her late 30s with a good-paying job that puts her in a high tax bracket. You want to leave your Roth IRA to her. Provided you opened the account at least five years before your death, she can benefit from tax-free withdrawals from the inherited balance, Reese says.

Inherited Roth IRAs may have RMDs, depending on whether the beneficiary is a spouse or not. Consult a tax expert if you inherit a Roth IRA.  

“The beauty of the Roth IRA is if Grandpa has money in a Roth and continues to save and invest, when the money is handed over to the grandchild, the inheritor can take the money as their own, and any withdrawals are totally tax-free,” Reese says. “The wealth transfer happens without the IRS getting their hands on the money.”

Cash-flow options

Having tax-free income from a Roth IRA also provides cash-flow options. Though retirees can start taking Social Security as early as age 62 (albeit with reduced benefits), your monthly payout will be significantly higher if you delay taking benefits until after your full retirement age (FRA). In fact, the Social Security Administration will boost your monthly payout by up to 8 percent every year you hold off taking retirement benefits, up until age 70.

Where does the Roth IRA come in? If you can take tax-free withdrawals from your Roth IRA, you can push out the date you start taking Social Security and take advantage of the annual boost to your benefit payment.

There’s no other investment that “guarantees an 8 percent return like delaying Social Security does,” Reese says. What’s more, by taking income from your Roth IRA to meet your cash needs, you won’t inadvertently put yourself in a higher tax bracket, as you might if you pulled cash from a traditional IRA or 401(k), which are taxed at normal income rates. 

“The Roth IRA is a great way to bridge the income gap from the day you retire until the day you take Social Security,” he says.

If you hold a traditional IRA, converting to a Roth IRA might make financial sense, particularly during a bear market. Money you withdraw from a traditional IRA to open a Roth can be taxed, but the tax hit is smaller when the returns on your IRA investments are down.

Generally speaking, the best time to do a Roth IRA conversion is when you have “a dip” in your taxable income or your taxable income is negative for some reason, says Kelly Wright, director of financial planning at Verdence Capital Advisors in Hunt Valley, Maryland. 

These so-called low tax years can occur when you are well into retirement and your income is lower, for example, or when a onetime event takes a bite out of your taxable income, such as a massive medical deduction or a large business loss.

In such circumstances, you may be “better off doing a Roth conversion now and paying little or no taxes” on it, and getting tax-free withdrawals going forward, Wright says.