Learn more about taxes on Roth IRAs in most common situations, and how taxes work for contributions, withdrawals, and transfers.
How Roth IRA Taxes Work
You can open a Roth IRA by setting up an account with a financial institution or brokerage. You then can contribute money to the account each year. Your contributions must be made with after-tax funds. When you take out the funds from the Roth, you don’t have to pay any taxes. You can leave the money in the account as long as you like. However, there are some qualifications and restrictions on contributions and withdrawals that affect your taxes.
Taxes on Roth IRA Contributions
You can only contribute to Roth IRAs and other types of IRAs to a total amount each year. You can make contributions if you have taxable compensation and your modified adjusted gross income (MAGI) is less than $208,000 for a married couple filing jointly or $140,000 for a single or head of household individual. If your MAGI is above a certain amount, your contribution limit may be reduced. Then you can only contribute up to the lesser of:
$6,000 ($7,000 if you are age 50 or above) orYour taxable compensation for the year
The Internal Revenue Service (IRS) penalizes excess contributions (contributing over the limit for the year). If you contribute too much to your Roth IRA in a year, you may have to pay a 6% excise tax on the extra amount. But you may be able to apply the excess contribution from one year to a later year if the contributions for that later year were less than the maximum.
Taxes on Roth IRA Withdrawals
You aren’t required to take withdrawals from your Roth IRA at any time during your lifetime. That means you don’t have to take a required minimum distribution (RMD) from your Roth account at age 72 (70½ if you reached this age before January 1, 2020). Withdrawals from a Roth IRA are usually tax-free because you paid the taxes when you made the contributions to the plan. But Roth distributions must meet certain qualifications to avoid paying taxes and penalties on the distribution amount. To avoid penalties, distributions must be made:
Five years or more after your first tax year of having the accountOn or after you reach age 59½
If you take a distribution before age 59½, you may have to pay an additional 10% tax on these early distributions. There are, however, some exceptions to these requirements:
There’s no penalty if the distribution is to your beneficiary or your estate after your death. If you become disabled before age 59½, you don’t have to pay the additional 10% tax penalty for withdrawals. You must furnish proof of your disability from a physician. You can withdraw money from your Roth IRA before age 59½ to use for buying your first home. Your total qualifying distributions must be $10,000 or less for costs of buying, building, or rebuilding the home, including settlement, financing, and closing costs. If you suffered a loss from being in a declared disaster area, you may be able to take a distribution from your Roth IRA. The distribution may be taxable, but you may be able to avoid penalties. You’ll avoid the 10% penalty but you’ll still pay income tax on the earnings portion if you use a Roth IRA withdrawal for qualified education expenses.
How to Pay Taxes on a Roth Conversion
You may be considering moving your Roth IRA to another type of retirement plan or from an IRA to a Roth IRA. This is called a rollover or conversion. Some conversions aren’t allowed, while others have tax effects. You can convert a traditional IRA to a Roth IRA. However, since no tax has been paid on the traditional IRA, you must include the untaxed amount in your gross income from the year. You may also have to pay the 10% early withdrawal tax on these amounts, or they may be treated as excess contributions, with penalties applied. You can only transfer a Roth IRA into another Roth IRA, but you can transfer a Roth 401(k) from an employer retirement plan into an individual Roth IRA. In this case, the tax has already been paid, so there’s no taxable effect. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! When you make a Roth IRA withdrawal, you’ll receive a Form 1099-R from your brokerage firm showing the amount of the withdrawal, any tax you withheld, and whether the distribution is taxable. Give this form to your tax preparer to include in your tax return.
