A Roth IRA is an individual retirement account that allows you to contribute after-tax money. With a Roth IRA, you will grow your account tax-free and pay no income tax on qualified distributions during retirement. Just like other retirement savings accounts, the IRS makes changes to the contribution limits to Roth IRA each year.
The Roth IRA contribution limits in 2024 are $7,000. If you are 50 or older, you get an extra $1,000 catch-up contribution. For 2023, the Roth IRA contributions limits are $6,500 or $7,500 if you are 50 or older. These contribution limits are the same for the traditional IRA in 2024 and 2023.
You can open a Roth IRA from your local bank, credit union, or online brokerage firms and investment companies with retirement services.
How does a Roth IRA work?
The Roth IRA is a retirement savings account you can open from banks, credit unions, or online brokerage companies. The Roth IRA contributions come from your after-tax wages. While the Roth IRA does not give you upfront tax benefits, you grow your account tax-free and pay no income tax on your withdrawals.
Your eligibility to make contributions to a Roth IRA depends on your income and filing status. The IRS uses your modified adjusted gross income(MAGI) to determine your eligibility. If your modified AGI is higher than the limit, you will not be eligible to make contributions to your Roth IRA account for that year.
check if you are eligible to make contributions to a Roth IRA in 2024
What are the Roth IRA contribution limits in 2024
In 2024, the Roth IRA contribution limits are $7,000. If you are 50 or older you get an extra $1,000 catch-up contribution. For 2023, the contribution limits to a Roth IRA are $6,500. If you are 50 or older, you can contribute up to $7,500.
Pros of Roth IRA
The Roth IRA is a great retirement account if you want to make extra after-tax contributions to your retirement savings. Additionally, the account comes with a lot of flexibility in investment options. The Roth IRA allows you to invest in various investments including individual stocks, mutual funds, index funds, bonds, etc. The Roth IRA also comes with fewer fees compared to employer-sponsored plans such as pre-tax 401(k) or Roth 401(k) plans.
Another benefit of a Roth IRA you probably did not know about is that you can easily transfer the account to your descendants tax-free. However, beneficiaries must start taking required minimum distributions (RMDs) after the original account owner dies. Furthermore, the account must be distributed within 10 years. Your heirs will not pay income tax on distributions from the Roth IRA funds they inherited from you.
Pros of Roth IRA summary
- You grow your account tax-free
- No RMDs requirements
- Qualified distributions are tax-free
- You can transfer the account to your heirs tax-free
- It is easy to set up and manage a Roth IRA
- Roth IRA comes with a lot of investment options
- Fees are lower compared to employer sponsored plans such as 401(k), Roth 401(k), 403(b), and similar plans
- There is no age limit to making contributions
Cons of Roth IRA
The biggest drawback of the Roth IRA is that it does not offer upfront tax benefits. Your contributions will come from after-tax wages, and therefore, it may be difficult to make large contributions.
The Roth IRA contribution limits are lower than Roth 401(k) and 401(k). For 2024, the contribution limits to a Roth IRA are $7,000 or $8,000 for people who are 50 and older. These limits are much lower compared to the $23,000 or $30,500(if you are 50 or older) contribution limits to the Roth 401(k) and 401(k) during the same year.
Like many other retirement plans, you may pay a 10% early withdrawal penalty if you take money from your Roth IRA before you turn 59½. Furthermore, if your account is not at least 5 years old, you may pay taxes on earnings you made on your contributions. The early withdrawal penalty can be avoided if you fall into the following categories:
- You are buying a primary home for the first time
- You became terminally ill
- Funds are being used for medical expenses
- You are paying for higher education
- You are taking a reservist distribution.
Finally, the Roth IRA comes with income limits for making contributions. For the year your income is higher than the Roth IRA income limits, you will not be eligible to make contributions for that year.
Summary of a Roth IRA cons
- High-income earners may not contribute to the account
- You could pay a 10% penalty and tax may apply to your earnings if you withdraw money early and/or violate the 5-year rule
- Max Roth IRA contribution limits are lower than other retirement plans
- No upfront tax benefits
What is the catch-up contribution to Roth IRA in 2024?
The catch-up contribution to the Roth IRA in 2024 is $1,000. This catch-up contribution is also the same for 2023.
Roth IRA income limits in 2024
Before you make contributions to your IRA, you first need to evaluate your eligibility. The IRS sets Roth IRA income limits each year which determine your eligibility based on your modified adjusted gross income(MAGI) and filing status.
Here are the Roth IRA income limits in 2024.
If you are filing single and your MAGI is under $146,000, you can contribute up to the maximum allowed for the year. For an income between $146,000 and $161,000, you will be eligible to make a partial contribution to your Roth IRA. Once your modified AGI reaches $161,000, you will not be eligible to make contributions to your Roth IRA in 2024.
If you are married filing jointly and your income is under $230,000, you will be eligible to make a full contribution the your Roth IRA. For income between $230,000 and $240,000, you will be eligible to make a partial contribution to your Roth IRA. After your modified AGI reaches $240,000, you will not be eligible to make contributions to your Roth IRA in 2024.
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