Contributions to Roth IRAs are not tax-deductible, but you can make withdrawals in retirement without taxation, including on any profit you made. Contributing to a Roth IRA can build an emergency fund or create a primary retirement savings vehicle. Let’s learn how to fund a Roth IRA, how to contribute to someone else’s account, and how to determine if you qualify for these accounts based on your income.
How To Qualify for Roth IRA Contributions
Unlike traditional IRA accounts, Roth IRA contributions are not tax-deductible, and to qualify, you must meet specific criteria.
Income Limitations
Additional qualifications depend on your filing status and modified adjusted gross income (MAGI). MAGI is calculated by adding any tax-deductible interest you may already have to your adjusted gross income (AGI). To be eligible, your MAGI must fall within certain ranges.
How To Fund a Roth IRA
There are many ways to fund a Roth IRA. Two common options include transferring money from an existing retirement account or investing directly with the broker company from your bank account. You choose how much you contribute to a Roth IRA and when.
Bank Transfer
The simplest way to add money to your Roth IRA account is by direct deposit from your bank account. This method works just like any other ACH money transfer process: To consistently grow your retirement fund, set up automatic payments into your Roth IRA. The U.S. Securities and Exchange Commission (SEC) offers a free online compounding interest calculator to help you figure out how much money to contribute per month to reach your retirement goals.
Alternative Funding Options
Through transfers, rollovers, or conversions, you can also move existing retirement funds into your Roth IRA. A transfer occurs between accounts of similar type, and a rollover occurs between different account types, such as a 401(k) to Roth IRA. When you move funds from a traditional IRA to a Roth IRA, this is called a Roth conversion. Whatever method you choose, move existing retirement funds directly into the new Roth IRA without making stops in other accounts to minimize taxes, and keep in mind that some IRS stipulations do apply.
Choosing Investments
It can be challenging to determine the best mix of investments to select for how much money you want in retirement based on different scenarios. Bonds, cryptocurrency, REITS (real estate investment trusts), mutual funds, and ETFs (exchange-traded funds) are just a few investment options for IRAs.
Helping Others Make Roth IRA Contributions
The individual account holder typically funds a Roth IRA. You can’t directly contribute to another person’s Roth IRA. However, you can make Roth IRA contributions on another person’s behalf by establishing a trust or other legal arrangement, such as appointing a designated beneficiary. The trustee would then be responsible for making contributions on behalf of the beneficiary and managing the account.
Spousal IRAs
A spousal IRA is an excellent way for a couple to help save for retirement. One spouse who is earning income sets up a spousal IRA or a spousal Roth IRA in the name of the other spouse.
Custodial Accounts
You can set up a custodial account for your child or a minor, as long as they earned taxable income that year. One stipulation is that the amount you give then deposit can’t exceed what they earned in taxable income that year. Otherwise, gift taxes may apply.
