5 Key Roth Retirement Account Rules You Should Know

IN THIS ARTICLE YOU'LL DISCOVER

• What the Roth five-year rule is
• Who qualifies for a Roth IRA
• Five key rules for using a Roth account at work or on your own

Debra H. says, “I really enjoy learning about retirement topics on your podcasts. Would you please explain how the 5-year rule applies to transferring a Roth 401(k) to a Roth IRA in an upcoming podcast? Thanks for the valuable information you provide.”

David R. is also interested in learning more about Roth accounts. He says, “My employer offers a Roth 401(k) option, but I don’t think I qualify due to my income. I like the idea of paying tax for my contributions now. Can you explain if there’s a way for me to participate?”

Thanks for your questions, Debra and David! Roth accounts have nice benefits that cut taxes. But like anything governed by the IRS (Internal Revenue Service), they have a sea of rules, which can be confusing to navigate.

What Is a Roth Retirement Account?

Most retirement plans—such as a traditional IRA, a 401(k), and a SEP-IRA—allow owners to make tax-deductible contributions if you meet certain requirements.

For instance, if you earn $60,000 and contribute $5,000 to a workplace 401(k), you pay income tax on $55,0000 not on $60,000. However, when you retire and take withdrawals of contributions and earnings, Uncle Sam catches up with you by imposing income tax on any distributions.

Contributions to any type of Roth are taxed in the year you make them. However, your account earnings and all future withdrawals are completely tax-free if you meet certain rules.

But Roth accounts—such as a Roth IRA, a Roth 401(k), or a Roth Solo 401(k)—have the opposite taxation. Contributions to any type of Roth are taxed in the year you make them. However, your account earnings and all future withdrawals are completely tax-free if you meet certain rules, which we’ll cover.

If you invest for decades and your Roth account mushrooms in value, it’s really nice to know that you’ll never have to pay income tax on those earnings. And if income tax rates increase down the road, that could make having a Roth especially sweet. 

Now, let's look at some things you need to know about Roth retirement accounts.

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5 Things You Should Know About Roth Retirement Accounts 

1. You can withdraw original Roth contributions without penalty.

Besides tax-free income in retirement, one of the best parts about having a Roth...

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