A true tax-free investment will meet two basic tests. They will first be free from every type of tax which means free from federal tax, state tax, and capital gains tax. The second thing is that the investment can’t count as provisional income. Roth IRA’s meet all those criteria as long as you are at least 59 and a half.

Anything with the word Roth in front of it should be embraced as a truly tax-free investment, including Roth IRA’s, Roth Conversions, and Roth 401(k)’s.

You can’t make a significant amount of money and invest in a Roth IRA. As a married couple, if your combined earned income is between $193,000 and $203,000, your ability to contribute to a Roth IRA gets phased out.

If you make too much money there are other ways to contribute money to tax-free accounts, like a back-door Roth or the LIRP.

Anyone of any age can contribute to a Roth IRA as long as they have earned income. The only exception to that is alimony.

We should all know what the Roth contribution limits are. As of 2019, for a single individual, the limit is currently $6000 per year. The Roth 401(k) has different contribution thresholds. Someone younger than 50 can contribute up to $19,000 per year. Someone older than 50 can contribute up to $25,000 per year.

You can do both a traditional Roth IRA and a Roth 401(k) in the same year.

Roth 401(k)’s do not have income limitations as opposed to the traditional Roth IRA. For couples that make more than $203,000, that is an important option.

Roth conversions do not have income limitations. Even Bill Gates could convert the money he makes each year to a Roth conversion. If you are at a high marginal tax rate you have to assess if it makes sense and is worthwhile to do so.

Roth conversions do not count towards your modified adjusted gross income threshold of $203,000 as a married couple. Roth conversions will not prevent you from doing any sort of traditional Roth contributions.

 

Tune in next week for Part 2 of 15 Things You Should Know about the Roth IRA.