4 Things Everyone Gets Wrong About Roth IRAs

You probably know that a Roth IRA is a great way to save for retirement on top of an employer-sponsored retirement plan. You’ve no doubt heard about the sweet tax advantages, too: Forgo a tax break today, watch your money grow tax-free for a few decades, and then get a source of income in retirement that the IRS can’t touch. Roth IRAs also have a lot of flexibility. For example, unlike a 401(k) or a traditional IRA, you can withdraw your contributions before you’re 59 1/2 without owing taxes or a 10% penalty.

But there are a few big misconceptions about how Roth IRAs work. Here are four things you need to know that everyone else gets wrong.

1. Who can contribute

Generally, you need earned income to contribute to any kind of IRA, and you have to choose a traditional IRA if your earnings exceed the Roth IRA income limits. But there are work-arounds to both of these rules.

If you’re working but your spouse isn’t (or vice-versa), you can contribute to a spousal IRA as long as you file a joint tax return. It’s a regular Roth IRA or traditional IRA, but it’s funded for a non-working spouse using the other spouse’s earnings. When your income is too high to make Roth IRA contributions, you can use a backdoor Roth IRA strategy, in which you contribute to a traditional IRA. Then you immediately convert it to a Roth IRA. Just be prepared to pay any applicable taxes by the tax deadline for the year you do the conversion.

2. When the five-year rules apply

To avoid paying income taxes when you withdraw your earnings, the Roth IRA five-year rules apply. One of those rules says that even when you can avoid the 10% penalty on withdrawals — like if you’re 59 1/2, or you’re using the money for a qualified home purchase or higher education — you’ll usually owe income taxes if you haven’t had a Roth account for at least five years.

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