A Special Window of Opportunity for Roth IRAs
Happy New Year!
If you’re familiar with my work, you know I’m a fan of Roth IRAs. Where else can you invest with almost total freedom and be able to look forward to reaping the rewards tax-free?
I’m writing today’s post because it’s a new year, which means a special window has opened up in which you can make contributions to your Roth IRA for both last year and this year. Since it’s now 2019, you’re free to start making 2019 contributions, but if you haven’t taken full advantage of your contribution limits for 2018, you still have time to do that too. To be precise, you have until April 15 of this year. (That’s how it works every year; you have until tax day in April of the following year.) Thus, between now and then, you have the chance to make up to two years’ worth of contributions in one fell swoop.
The general contribution limit for Roth IRAs is $5500 for 2018 and $6000 for 2019. Starting the year you turn 50, you get to contribute up to an extra $1000 beyond the general limit each year. So, if you turned 50 in 2018 or any year before that, your combined contributions for 2018 & 2019 could be as high as $13,500. If you’ll be turning 50 in 2019, your combined contributions could be as high as $12,500. If you won’t be turning 50 until sometime after 2019, then your combined contributions could be as high as $11,500. (The reason I keep saying “could be” is that your personal contribution limit depends on how much money you make from work, how much you receive in income from other sources, and what tax-filing status you use. For details, click here.)
What if you aren’t working? There are still three ways you could move money into a Roth IRA:
If you already have money in a different type of retirement account, such as a 401(k) or Traditional IRA, then you can roll some or all of that money over to your Roth IRA, regardless of your employment status. If the rollover is from a Roth account inside a 401(k), 403(b), 457(b), or TSP, then it won’t count as taxable income this year. If the rollover is from any other type of retirement account, such as a Traditional IRA, a profit-sharing plan, or a pretax account inside a 401(k), then any portion that’s been tax-deferred up to that point will count as taxable income this year. But either way, there won’t be a 10% penalty even if you’re younger than 59 1/2, and you’ll have added “fresh” money to your Roth IRA. (Since that money was previously in a different type of retirement account, it's considered “new” to the Roth IRA. Consequently, even if you’re already older than 59 1/2, you’ll have to wait five years from the year of the rollover before the earnings off that new money can be withdrawn tax-free.) What’s more, unlike contributions to a Roth IRA, there’s no annual limit on rollovers (just be sure you’re not taking too big of a tax hit in any one year), and it doesn’t matter how high your income is. Also, unlike contributions, there’s no deadline for making rollovers.
If you’re married and your spouse is still working, then if you file your taxes jointly, you can contribute to your Roth IRA based on your spouse’s working income. If your spouse worked last year and earned enough for both of you to max out your Roth IRA contribution limits for 2018, then you can go ahead and contribute up to your full contribution limit. The same goes for 2019 and every year going forward that your spouse works and you don’t. (Note that there's no such thing as a "Joint Roth IRA". You and your spouse will have to maintain separate Roth IRAs. If you each designate the other as the sole primary beneficiary of your Roth IRAs, then when one of you dies, the other will be able to merge the two Roth IRAs into one.)
You can transfer money over from a different Roth IRA. This might be a good idea if the other Roth IRA isn’t serving you. Unlike a rollover from a different type of retirement account, the IRS doesn’t see this as “new” money coming into your Roth IRA, so there’s no five-year waiting period that starts when the money gets transferred. The only relevant five-year waiting period is the one that started when you made your first contribution to any Roth IRA (not necessarily the one you just transferred money into). As with rollovers, there’s no deadline for making transfers between Roth IRAs.
