28 May Do you have to be working to open a Roth IRA?

Q. Do you have to be working to open a Roth IRA?
— Unemployed

A. Many investors are unsure, when they’re ready to start an IRA, whether they’re better off with a Roth IRA or a traditional one.

A Roth IRA will be more beneficial than a traditional IRA if the tax rate at the time of the contribution is less than the tax rate at the time of distribution, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

As provided in IRS Publication 590-B, to be a Roth IRA, the account must be designated as such when it is opened, he said.

The primary requirement for contributing to all IRAs is having earned income.

So that means while you don’t need to be working right now — we know many have lost their jobs because of the coronavirus pandemic — you need to have earned income sometime in the 2020 tax year.

Let’s go a little deeper into the rules.

“The maximum contribution for 2020 is $6,000, however if you are age 50 or older the limit is $7,000,” Papetti said.

The ability to contribute to a Roth IRA is subject to income limits based on your Modified Adjusted Gross Income (MAGI) as follows:

For 2020, singles must earn less than $124,000 to make a full contribution, while those who earn up to $138,999 can make a partial contribution.

Those married and filing joint tax returns can save the full amount if they earn up to $196,000, and they can make a partial contribution if they earn up to $205,999.

Note that under the CARES Act, IRA distributions got some new rules.

“It allows for distributions up to $100,000 from retirement accounts, including Roth IRAs, without the imposition of a 10% early distribution penalty for those under 59½,” Papetti said. “Roth IRA owners have three years to either pay the tax on the distribution if applicable, or they can repay the withdrawal over three years and avoid paying any tax.”

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This story was originally published on May 28, 2020.

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