The IRA is the backbone of many people’s retirement savings plans, and the Roth IRA is a particular favorite. A Roth lets you take withdrawals tax free at any time and tax-free withdrawals of earnings on contributions after a five-year holding period, as long as you are at least 59 ½, using the money to buy your first home or disabled. That’s a great deal for many Americans!
All you have to do to meet the requirements for having a Roth IRA, says Investopedia in the article, “Roth IRA Contribution Rules: The Basics,” is work for a living. That can be earned income that you get from a job, including commissions, tips and taxable fringe benefits, or net earnings for the self-employed.
A couple with a large difference in incomes might want to add the higher-earning spouse's name to a Roth account to increase the contribution limits. However, the IRS says you can’t maintain joint Roth IRA accounts. There is a way to contribute larger amounts, if your spouse establishes his or her own IRA. A spouse who works can also contribute to a Roth IRA for a nonworking spouse (with sufficient income). However, remember that your contribution may be restricted or barred if your income is too high. Roth IRA contributions are phased out when your Modified Adjusted Gross Income (MAGI) is more than a set limit for your tax filing status.
There is no minimum or maximum age for making Roth IRA contributions. The fact that you participate in a qualified retirement plan doesn’t affect your eligibility to make Roth IRA contributions. The maximum contribution for 2018 is $5,500 ($6,500 if you’re 50+ by the end of the year). An annual contribution can’t exceed earned income.
Conversions to a Roth IRA from a taxable retirement account, like a 401(k) plan or a traditional IRA, don’t have any effect on the contribution limit. However, making a conversion adds to MAGI and may mean a phaseout of your Roth IRA contribution amount. Rollovers from one Roth IRA to another also aren’t taken into account in making annual contributions. Roth IRA contributions can be made up to the due date of the return for the year to which contributions relate. Therefore, contributions to a Roth IRA for 2017 could have been made through April 17, 2018, as that was the due date for the 2017 income tax return. Getting an extension of time to file a tax return, doesn’t give you more time to make an annual contribution. You can also make a Roth IRA contribution by having the IRS apply some or all of a tax refund.
Contributions to Roth IRAs aren’t tax deductible, because they’re done with your after-tax earnings. A Roth IRA is tax-free income for the future, but you may be eligible for a tax credit, of 10-50% on the amount contributed to a Roth IRA. Low- and moderate-income taxpayers may qualify for an additional tax break—the Saver's Credit, which is a retirement savings credit up to $1,000, based on your filing status, MAGI, and Roth IRA contribution.
You don’t have to report your Roth IRA contribution on your federal income tax return. However, you should keep track of it. This will help you show you’ve met the five-year holding period for taking tax-free distributions of earnings from the account.
When you make a Roth IRA contribution, the custodian or trustee will send you Form 5498. Box 10 of this form shows your Roth IRA contribution. Retain this form with your tax returns records for each year that you make a Roth IRA contribution.
There is one downside, but it’s far outweighed by all the benefits as described above. Contributions to Roth IRAs are not tax deductible, and they are made with your after-tax earnings. However, the idea is that you are creating tax-free income for your future. And that is well worth it!
Reference: Investopedia “Roth IRA Contribution Rules: The Basics”