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Roth IRA

A Roth individual retirement account (IRA) is an investment account that allows you to contribute for your retirement. Contributions to a Roth IRA are made after taxes and then your contributions and earnings grow tax-free.

Roth IRA features:

  • You can contribute each year up to the IRS defined limit or 100% of your earned income, whichever is less.
  • Roth IRAs offer tax-deferred growth, and qualified distributions are tax-free in retirement.
  • You may withdraw your contributions (not earnings) at any time, without tax or penalty.
  • There are no required minimum distributions (RMDs) on a Roth IRA—unlike a traditional IRA, which requires them at age 70½.

Things to consider:

  • Your modified adjusted gross income (MAGI) determines your eligibility to contribute.
  • You do not deduct your contributions on your tax return; they’re made with after-tax income.
  • Distributions are tax- and penalty-free after five years for those over age 59½ or if you qualify based on certain exceptions (see Withdrawals).
  • Nonqualified withdrawals of earnings may be taxed and you may owe a 10% IRS tax penalty (see Withdrawals).

Roth IRAs offer you an opportunity to create tax-free income during retirement and avoid RMDs beginning at age 70½. Tax-free retirement income may be appealing if you have a traditional IRA or a 401(k) and want to diversify your tax situation in retirement or if you estimate being in the same or a higher tax bracket in retirement as you are today.

Contribution limits—2017 and 2018 tax year:

  • Individuals under age 50 can contribute up to $5,500.
  • Individuals age 50 and older can make an additional catch-up contribution of $1,000.

Individuals who have earned income and their spouses, if married filing jointly, are eligible to contribute to a Roth IRA as long as their MAGI falls below certain limits.

For the 2017 tax year, you can make the following contributions to a Roth IRA:

  • Full contribution if your MAGI is less than $118,000 (single) or $186,000 (joint)
  • Partial contribution if your MAGI is between $118,000 and $133,000 (single) or between $186,000 and $196,000 (joint)
  • No contribution if your MAGI is above $133,000 (single) or $196,000 (joint)

With a Roth IRA, you can withdraw your contributions at any time, free of tax or penalty. Qualified distributions of earnings are income tax-free and penalty-free. Distributions are considered qualified after five years if you are at least age 59½ or as a result of death, disability, or for qualified first-time homebuyers.

If you take nonqualified distributions of earnings, you may owe income taxes and a 10% IRS penalty. There are a few exceptions that allow you to avoid the 10% penalty, which are:

  • Disability
  • Qualified first-time homebuyer ($10,000 lifetime limit)
  • Qualified higher education expenses
  • Qualified military reservist
  • Medical expenses in excess of 10% of adjusted gross income
  • Health insurance premiums for certain unemployed individuals
  • Substantially equal periodic payments
  • Death

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Any tax or legal information on this website is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC; Wells Fargo Funds Distributor, LLC; or any of their representatives may not give legal or tax advice.