American Funds ®

Retirement Planning

Roth IRAs

Get an in-depth look at the key features and benefits of Roth IRAs.

This table will help you take a closer look at the key features and benefits of Roth IRAs. Please note that the information provided in the table is for the 2015 tax year.


Eligibility

Your ability to contribute to a Roth IRA depends on your income level. (See Contributions for more information.)


Benefits

  • Earnings are tax-free (provided certain conditions are met).
  • You receive a tax credit for your contributions (if you are eligible).
  • Distributions are tax-free; you don’t need to anticipate owing taxes in the future.
  • Required minimum distributions are not mandatory during your lifetime.
  • Contributions can continue as long as you earn income (no age limitation).

Contributions

  • Your contributions are made with after-tax dollars; no deduction is available.
  • Your contribution limit is $5,500 (or 100% of compensation, whichever is less) for total contributions made to all traditional and Roth IRAs. If you are age 50 and older, you can make an additional catch-up contribution of up to $1,000.
  • Your contribution amount is reduced if your MAGI1 is above $116,000 (single filer) or $183,000 (joint filer). Contributions are not allowed when your MAGI reaches $131,000 (single) or $193,000 (joint).
  • If you exceed the MAGI limits, contributions to a Roth and the earnings can be recharacterized to a traditional IRA without penalty by that year’s tax filing — including extensions.
  • Participation in an employer-sponsored plan does not affect Roth contributions.
  • As long as you earn income, contributions can be made even after age 70½.

Earnings

Earnings grow tax-free. (Taxes and possible federal tax penalties apply on nonqualified distributions.)


Distributions

  • All qualified distributions are tax-free. Nonqualified distributions may be subject to taxes and possible federal tax penalties.

  • Nonqualified distributions are considered to be taken in the following order:

    1. from contributions to the Roth until used up

    2. from conversions to the Roth (on a first-in, first-out basis when there is more than one conversion), each depleted in the following order:

      • deductible contributions
      • nondeductible contributions
    3. from earnings

  • There are no required minimum distributions during your lifetime.

  • Distributions due to death:

    • If your beneficiary is your spouse, he or she may roll the distribution over into his or her own Roth IRA or postpone life expectancy payments until you, the Roth IRA owner, would have been 70½.
    • A nonspouse beneficiary must take one or more distributions or the entire account balance within 5 years of your death, or take periodic distributions over their life expectancy within 1 year of your death.

Rules on Roth Withdrawals

  • Withdrawals of contributions are always tax-free and free of federal tax penalty.

  • If you withdraw money that has been converted, the taxable portion of converted amount is treated as income. Possible federal tax penalties apply if converted amounts are withdrawn before 5 years since latest conversion.

  • Withdrawals of earnings are tax-free after the initial contribution or latest conversion, if invested for 5 taxable years and one of the following is true. You:

    • have reached age 59½
    • have become disabled
    • are using the withdrawal for a first-home purchase (up to $10,000 lifetime maximum)
    • die

    Earnings are also withdrawn free of federal tax penalty if the money is used for:

    • post-secondary school expenses
    • periodic payments
    • health insurance premiums after unemployment of at least 12 weeks
    • certain medical expenses
    • payment on a levy

Rollover From Retirement Plans

  • Roth 401(k) and 403(b) balances may be rolled over to a Roth IRA.
  • Non-Roth balances may be rolled over to a Roth IRA regardless of your modified adjusted gross income (MAGI) or tax filing status. The rollover amount is subject to income tax.

Converting From a Traditional IRA2

  • Assets in a traditional IRA can be converted to a Roth IRA regardless of your modified adjusted gross income (MAGI) or tax filing status.
  • The taxable portion of the converted amount will be treated as taxable income.
  • Future contributions can be made to the new Roth IRA once it has been converted from a traditional IRA.
  • Your conversion must be initiated by December 31 of a given year to be considered a conversion for that taxable period.

Undoing (Recharacterizing) a Roth IRA Conversion

  • A Roth conversion can be undone (recharacterized) for any reason.
  • You have until your tax filing deadline (including extensions) of the year you converted to a Roth IRA to undo your conversion.
  • If the converted amount (plus earnings) is returned to a traditional IRA, the IRS treats the original conversion as though it never happened.

Reconversion

If you want to reconvert to a Roth IRA, you must wait until the beginning of the new tax year following the tax year that you converted or a minimum of 30 days after the recharacterization is completed, whichever is later.

Please discuss your conversion situation and options with your tax advisor or financial professional.


1 Your modified gross adjusted income (MAGI) is calculated by subtracting certain expenses and allowable adjustments from your gross income. To determine your MAGI, contact your tax advisor.

2 Converting to a Roth IRA is a taxable event, and the rules and tax calculations can be complicated. State income-tax rules for conversions may differ from federal rules. We encourage you to discuss conversion options with your tax advisor or financial professional.

You can learn more about Roth IRAs in IRS Publication 590. We also encourage you to discuss your financial goals, eligibility and individual tax situation with your tax advisor or financial professional.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.  

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses , which can be obtained from a financial professional and should be read carefully before investing.