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Roth IRA: How it works & when consider it

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Whether your retirement is right around the corner or many years away, one thing is for sure. Having to worry about your income at that point likely isn’t part of your plan. That’s why saving now for retirement is so important.

An individual retirement account (IRA) allows you to save for retirement in a tax-advantaged way. But a Roth version of an IRA has some unique tax benefits that could make a notable difference in your retirement savings over time.

We'll cover:

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What is a Roth IRA & how does it work?

A Roth IRA is a retirement account funded by money that you've already paid taxes on, so withdrawals of your contributions are tax-free at any time. While there is no tax deduction for Roth IRAs, your earnings grow tax-deferred in the account, and if you make a qualified withdrawal, those earnings can be withdrawn tax free.1 These factors make it a tax-efficient way to help minimize your tax liability in retirement.

You can invest the money in a Roth account in a variety of assets, including:

When to open a Roth IRA

Generally, people should consider opening a Roth IRA when they are young and haven't reached their peak earning years. Think about your current earnings. It's impossible to predict the future, but if you expect tax rates to increase or anticipate being in a higher tax bracket when you retire, contributing to a Roth IRA might be right for you. This can allow you to pay taxes on the money used to fund your Roth now at the current rates, and then enjoy tax-free income in retirement.

Who is eligible to open a Roth IRA?

You or your spouse must have earned income to contribute to a Roth IRA. Earned income is money from a job or self-employment. Income that doesn't qualify as earned includes rental income, capital gains, IRA distributions, Social Security retirement benefits, interest and dividends. In addition, your total modified adjusted gross income (MAGI) must be within IRS thresholds.

Roth IRA income thresholds for 2023 & 2024

  • If you make between the MAGIs listed, you can contribute to a Roth IRA, but it will be a reduced amount.
  • If you make equal to or more than the maximum limit listed, you can't contribute anything to a Roth IRA. (If this applies to you, consider these alternatives).

Filing status
2023 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
2024 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
Single or head of household
Married filing jointly
Married filing separately

How Roth IRA contributions work

You can open an IRA account by working with a provider, like a financial services firm or bank, and set up contributions. The deadline to contribute to a Roth IRA is typically April 15 of the following tax year. (If April 15 falls on a weekend or holiday, the deadline typically shifts to the following business day.)

Roth IRA contribution limits for 2023 & 2024

  • 2023 contribution limits: $6,500 under age 50; $7,500 age 50 or older
  • 2024 contribution limits: $7,000 under age 50, $8,000 age 50 or older

What is a Roth conversion?

One way to fund a Roth IRA is to convert a traditional IRA into a Roth.2 You can perform a Roth conversion regardless of how much you earn. When you convert a traditional IRA into a Roth, you're taxed as if you received a distribution.

You can minimize this tax hit in a few ways. For example, you might perform a Roth conversion in a year in which you have a dip in income and are therefore in a lower tax bracket. You also can spread your conversion out over a few years instead of getting hit with the tax bill all at once.

Deciding whether to convert your traditional IRA into a Roth—and planning for the tax bill—is complex. For this reason, it's a good idea to discuss the possibility with your financial advisor and tax professional.

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Creating a Roth IRA can make a big difference in your retirement savings. All future earnings are sheltered from taxes under current tax laws. If you meet a qualifying distribution event, the Roth IRA can provide truly tax-free growth potential.

See the difference

How Roth IRA rollovers work

Chances are that you'll work for several employers throughout your career. As a result, your retirement assets can get complicated over time. You may find you have money in a previous employer's plan or have multiple IRAs that you want to consolidate.

IRA rollovers involve moving funds from another tax-qualified account. For instance, if your plan allows for Roth contributions (such as a Roth 401(k)), you can roll the balance directly into a Roth IRA.3

Otherwise, you can convert non-Roth funds into a Roth IRA and pay taxes on the conversion just as you would when converting a traditional IRA into a Roth.

However, IRA rollovers may not be the best option in certain circumstances. Be sure to talk to a financial advisor to learn about all of your options before making a decision.

529 plan rollover to a Roth IRA

The Secure Act 2.0 now allows beneficiaries of 529 accounts to roll over up to $35,000 over the course of their lifetime to their Roth IRA. Rollovers are subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years. This change helps reduce the risk of overinvesting in a 529 plan. 

Roth IRA vs. traditional IRA: How they compare

Traditional IRAs are also a common option to help bolster your savings through tax-deferred growth. They also can be a good option if you don't meet the income thresholds of a Roth IRA. Yet, this is another instance when a high income can pose a barrier. Your deduction may be limited if you or your spouse are covered by an employer-sponsored plan and your income exceeds certain levels.4

Here's a quick look at the differences between traditional and Roth IRAs:

Roth IRA
Traditional IRA
Made with after-tax dollars (not tax-deductible)
Made with pretax dollars (may be tax-deductible)
Penalty and tax-free after 5 years and age 59½
Penalty-free after age 59½ and taxed as ordinary income
Income Limits

How Roth IRA withdrawals work

Qualified withdrawals from a Roth IRA are the payments you can take after reaching age 59½ and meeting the five-year rule. These withdrawals aren't taxable, and you won't owe a penalty for taking the money out.

However, if you don't meet both requirements, you have a nonqualified distribution.1 In that case, taxes and penalties depend on whether you withdraw your original contributions or your contributions and earnings.

You can withdraw your original contributions to a Roth IRA tax-free and penalty-free at any time. But you'll owe income taxes if you withdraw any earnings from the account within five years of making your first contribution and before turning 59½. You also will owe a 10% early withdrawal penalty if you don’t meet one of the IRS penalty exceptions.

Once you've had the account for five years and turn 59½, you can withdraw both earnings and contributions from your Roth IRA for any reason without paying income taxes or penalties.

Thankfully, there are a few exceptions to the Roth early withdrawal penalty rules. This makes it possible to withdraw money during times of need, when your options may be limited. You can find more information on the exceptions here.

The Secure Act 2.0 also recently added and changed some existing exceptions to the 10% early withdrawal penalty including expenses related to a terminal illness, "hardship" withdrawals due to domestic abuse, premiums for long-term care contracts and family emergencies. Depending on the exception, the changes will be rolled out between now and 2025.

Do Roth IRAs have required minimum distributions (RMDs)?

No, RMD rules don't apply to Roth IRAs. So, if you don't need the money for living expenses in retirement, you can leave it in your account indefinitely. However, your beneficiary will be subject to specific distribution requirements.

Is a Roth IRA right for you?

If you're interested in learning more about the benefits of a Roth IRA or converting an existing retirement account into a Roth account, connect with a local Thrivent financial advisor. They can help you learn more about the nuances of saving for retirement and how a Roth IRA may complement your plan.

1Distributions of earnings are tax-free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

2State tax rules may differ from federal rules governing the tax treatment of Roth IRAs, and there may be conflicts between federal and state tax treatment of IRA conversions. Consult your tax professional for your state's tax rules.

3There may be benefits to leaving your account in your employer plan if allowed: You will continue to benefit from tax deferral; there may be investment options unique to your plan; fees and expenses may be lower; plan assets have unlimited protection from creditors under federal law; there is a possibility for loans; and distributions are penalty-free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

4For 2023, your contribution deduction is reduced if MAGI is between $73,000 and $83,000 on a single return and $116,000 and $136,000 on a joint return. If you're married filing jointly and an active participant in an employer sponsored retirement plan and your spouse is not, the deduction for your spouse's contribution is phased out if MAGI is between $218,000 and $228,000. For 2024, your contribution deduction is reduced if MAGI is between $77,000 and $87,000 on a single return and $123,000 and $143,000 on a joint return. If you're married filing jointly and an active participant in an employer sponsored retirement plan and your spouse is not, the deduction for your spouse's contribution is phased out if MAGI is between $230,000 and $240,000. If you're a married taxpayer who files separately, consult your tax advisor.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Thrivent financial advisors and professionals have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.

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