Questions and answers about Roth IRAs (Updated!)

The series on Roth Individual Retirement Arrangements (Roth IRAs) has covered a number of topics — what they are, how (and where) to open one, and which investments are best. Now, in the final part, we turn to some of your questions. Remember: I am not a financial adviser. I’m just a regular guy trying to gather information to help you. If you need more specific answers, please consult a CPA or an investment professional.

All of the questions below were submitted by Get Rich Slowly readers via comment or email. If your question isn’t here, please drop us a line so we can research an answer and add it to the list. If you are new to Roth IRAs, this article is not the place to begin. Start here, instead.

Man using computer at home

Types of Accounts and How Much You Can Contribute

Which is better: Investing in a Roth IRA with after-tax dollars or investing in a 401(k) with pre-tax dollars?

  • Also, does it make a difference if there is an employer match?
  • And if I already have a 401(k) through work, then why would I want to add to a Roth IRA?

There are a lot of variables here, so the answer for your situation may be different. But the traditional answer to this question is to…

Invest in the Following Order:

  1. If your job offers a 401(k), contribute to that each year until you’ve reached the limit of the employer match. Never turn down free money!
  2. If you still have money to invest, contribute to your Roth IRA.
  3. If you still have money to invest, then max out your 401(k).
  4. Once you’ve contributed all you can to these investments, then invest however you see fit in regular, taxable accounts.

Some people like to have all their accounts in one place. If you’re this sort of person, you may benefit from simply putting all your money into a 401(k) and not worrying about a Roth IRA.

However, there is another wrinkle to consider: When debating whether to invest in a 401(k) versus a Roth IRA, why not check with your employer to see if they offer a Roth 401(k) which allows you to invest with after-tax dollars (and withdraw tax-free in retirement)?

Also note that you can actually invest in both a 401(k) and a Roth IRA as long as you meet the requirements for both programs.

Is It Possible to Roll a 401(k) Into a Roth IRA?

It is possible, but you have to be careful. It is not a one-step process. Also, it’s difficult to do with an active 401(k) account. A mistake along the way could cost you a lot of money, so it’s a good idea to consult a financial adviser for help.

Here’s a discussion of the subject in the forum.

Can I have more than one Roth IRA? For example, can I have one at USAA and another at Vanguard?

To understand the answer, let’s step back and look at what an IRA is exactly: The “A” in IRA does not stand for “account.” If you look on the IRS website, you will see that the official definition of “IRA” is “Individual Retirement Arrangement.”

Every taxpayer can have only one Roth arrangement, but you can have multiple accounts as part of that arrangement. You can have as many Roth IRA accounts as you’d like.

Contribution Limits for Roth IRAs (and Traditional IRAs)

Contribution limits for 2015 and 2016:

  • Under 50 years of age: $5,500
  • Age 50 and over: $6,500

Note that your contribution limit applies to all of your IRA accounts (Roth and traditional) collectively; they don’t each get a $5,500 limit. In other words, you can contribute $100 each to 40 different Roth IRA accounts, but not $1,000 to each of them.

Who Can Invest and are There Limitations?

Can legal U.S. residents who are not citizens open an IRA?

  • Is it a good idea?
  • What if I don’t plan to be in the U.S. at retirement age?

Anyone with earned income in the U.S. can contribute to a Roth IRA — citizenship is not required. However, for greater flexibility, you may want to consider a traditional IRA or other investment accounts, depending on your goals.

Be sure to check with a tax professional to see which solution best fits your exact situation.

How does the IRS know that you contributed to a Roth IRA?

  • How does it know if you contributed more than you were allowed?

At the end of the year, the investment company submits Form 5498 to the IRS, which reports the amount that you invested. For example, it might show that, in 2015, you invested $5,000 in a Roth IRA. The IRS computers then match this form electronically to your tax return to check for discrepancies. If you are over the income limit, your return will be flagged.

What happens if I contribute too much to a Roth IRA?

If you contribute more than allowed, you are subject to a 6 percent excess-contribution penalty. However, you have until the annual contribution deadline (generally April 15th) to withdraw any overage from the account before the penalty is assessed.

What options are there if I earn too much to contribute to a Roth IRA?

Your Contribution May Be Affected by Your Modified AGI

These tables show whether your contribution to a Roth IRA is affected by the amount of your modified AGI as computed for Roth IRA purposes. They show how to determine the amount of Roth IRA contributions that you can make for …

If you make too much to contribute to a Roth IRA, be sure you’re maxing out your 401(k), if you have one. You can also contribute to a traditional IRA.

Both of these are excellent options. But note that, if you have a 401(k) at work, your contributions to a traditional IRA may not be tax deductible. Another option for high-income individuals to consider is to contribute to an annuity.

Here are two more forum discussions about Backdoor Roth and 401(k) rollover strategies and What to do when Roth IRA isn’t an option.

My wife is a stay-at-home mom and doesn’t have any earned income. Does this mean she cannot have a Roth IRA?

To every rule, there is an exception. If you are married and filing a joint return, then both spouses can max out IRAs from a single income (so long as the other Roth IRA requirements are met).

I’m self-employed and I make more than the maximum allowable for a Roth IRA. Does a SEP-IRA make sense?

A SEP-IRA may make sense, but that will depend on your individual circumstances. Basically, self-employed people can contribute roughly 20 percent of their first $200,000 of pre-tax earnings to a SEP-IRA. However, they must contribute the same percentage for all employees. If you are the only employee, or if you don’t mind giving all employees the same retirement benefits, then this may be a good choice. This is another case in which you should consult a financial adviser.

Types of Roth IRA Investments

I want to open a Roth IRA, but I’m confused by the mutual funds offered by different companies.

  • For example, ING Direct (now Capital One 360) offers six funds, and another bank offers only five. What’s the difference?
  • Which should I choose?

Only you can answer that question. Here’s how I would approach this problem: I would first locate the investment I want to purchase. Is it an individual stock? Is it real estate? Or is it, as I encourage, an index fund?

Once you’ve decided on an investment, then find a company that will let you buy the investment from within a Roth IRA at the lowest cost. This shouldn’t take too much effort. If, like me, you decide you like Vanguard’s mutual funds, then open an account directly with Vanguard.

Can I really use my Roth IRA to buy a house?

Sort of. There’s an animal called a self-directed IRA which allows you to invest in real estate. However, you cannot invest in anything directly related to you, like your company or your primary residence. This is definitely a topic you should take up with a tax professional if you have a strong interest in doing something like this.

In many cases, complex Roth IRA questions are best answered by a qualified financial professional. Each person’s situation is different. It is difficult to give one-size-fits-all advice in the context of this blog. Use the National Association of Personal Financial Advisors to find an independent, fee-only adviser.

I opened a Roth IRA at a local bank, but I noticed that I’m only getting a 1.98% return. This seems unusually low. Should I withdraw my money and move it to Vanguard, Fidelity, or T. Rowe Price?

Your money is probably in a savings account or certificate of deposit. Your bank may offer additional financial services — check with them to see where else you can put the money. Barring that, yes, absolutely move the money to a different location. You may have to pay a transfer fee, but it’s worth it.

As Mandy writes in the forums, “Traditionally, banks are one of the worst places to invest because they typically offer high-load/high-fee or very conservative investments and charge higher service fees than most other brokerages. Banks are for banking, not investing.”

(See Which investments are best for a Roth IRA? for ideas on where to put the money.)

Withdrawing From a Roth IRA

Can I really withdraw money from my Roth IRA without penalty?

That depends on what you would consider a penalty. Here is a direct quote from the IRS website:

“You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you’re under age 59 1/2. The additional tax is 25% if you take a distribution from your SIMPLE-IRA in the first 2 years you participate in the SIMPLE IRA plan. There is no exception to the 10% additional tax specifically for hardships. See chart of exceptions to the 10% additional tax.”


Source: Publication 590b – Fig. 2.1

The GRS Introduction to Roth IRAs series

Understanding how important it is to get started saving for retirement, check out the rest of our Roth IRA series to learn about how to start your Roth IRA, which investments are best, and other general questions about these great accounts.

Part 1: The extraordinary power of compound interest
Part 2: What is a Roth IRA and why should you care?
Part 3: How to open a Roth IRA (and where to do it)
Part 4: Which investments are best for a Roth IRA?
Part 5: Questions and answers about Roth IRAs

[Thanks to all of the people who helped put this series together, including William Cowie, Vincent, Sabino, Dylan, Mandy, and tindyhands.]

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