Dear Liz: I read your useful summary advantages of the Roth IRA. I recently retired and decided to open Roth (I know, pretty late) along with my traditional IRA. I have an investment manager who will hopefully create some gains on that account. One thing I’ve learned is that I have to wait five years before I start withdrawing earnings from Roth tax-free. For that reason, it might be helpful to encourage readers to open a Roth IRA early, with at least a small contribution, to keep the clock ticking toward that five-year deadline.
Answer: The five-year rule applies, as you mentioned, only to earnings, because contributions to the Roth IRA can be withdrawn at any time. When you reach at least 59 years of age, earnings can be raised without penalty provided the Roth IRA is open for at least five tax years.
We hope you’ve also been informed about the “earned income” rule, which requires you to have earnings – such as salaries, wages or self-employment income – to contribute to Roth or a traditional IRA. Contribution to the IRA or Roth IRA more than allowed may spend excise duty of 6% per year for each year the excess contribution remains in the account.
If you’ve earned an income – let’s say you work part-time in retirement – you can’t contribute more than you earn. For example, if you earn only $ 5,000 a year, you cannot invest the full $ 7,000 that is normally allowed for people 50 and older. (The contribution limit is $ 6,000 for younger people.)
If you contributed by mistake, contact your tax advisor about the following steps.
Liz Weston, a certified financial planner, is a columnist for personal finance NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, no. 238, Studio City, CA 91604, or using the “Contact” form at asklizweston.com.