What is a Roth Contributory IRA? [Should You Start One?]

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Most people have heard of a Roth IRA. However, there is a variation on it that goes by the name Roth Contributory IRA and isn’t as well known.

Can it help you? Should you care about it?

In this post, we’ll be taking a look at what exactly a Roth Contributory IRA is and whether the difference between it and the more popular Roth IRA could make a difference for you.

What is a normal Roth IRA?

IRA stands for Individual Retirement Account and a Roth IRA is an account in which you can contribute after-tax dollars to it. This differs from a traditional IRA in which you may contribute pre-tax dollars into it, thereby not having to pay taxes on the contributed amount for that year.

Contribution limits for IRAs

Max contribution limit for a traditional and a Roth IRA are both the same. You can contribute up to $6,000 for the year 2022. If you’re 50 years of age or older, you may contribute up to $7,000 for the year. If you have a spouse, each of you can open your own IRAs and contribute up to $6,000 each (or $7,000 for ages 50 and older) for a total of $12,000.

Keep in mind that if you own both a traditional and Roth IRA, the contribution limit applies to the combined amount in both accounts. For example, if you have $2,000 for the year in your traditional IRA and want to contribute the rest to your Roth IRA, you can only contribute up to $4,000 in that account.

Income limits for Roth IRAs

In 2022, modified adjusted gross income (AGI) must be as follows to qualify for contributing to a Roth IRA:

  • For taxpayers filing as single, modified AGI must be less than $129k
  • For taxpayers filing as married, modified AGI must be less than $204k

Ways to fund a Roth IRA

A Roth IRA can be funded in a couple of ways:

  • Through a conversion of an existing traditional IRA into a Roth IRA
  • Through direct contributions to a Roth IRA

Your Roth IRA can even include a mixture of a traditional IRA that’s been converted along with fresh direct contributions.

What makes the Roth Contributory IRA different from the normal Roth IRA?

Despite the difference in naming, a Roth Contributory IRA is actually the same account as a normal Roth IRA. However, a normal Roth IRA can be called a Roth Contributory IRA if the funds in the IRA were purely via direct contributions.

Withdrawing from a Roth Contributory IRA – No penalty

You can withdraw from a Roth Contributory IRA starting at 59.5 years of age without penalty, or if you become permanently disabled. There are also special exceptions for if you want to use the money to purchase a home for the first time or to pay for your children’s college tuition.

Withdrawing from a Roth Contributory IRA – With penalty

However, if you wish to withdraw from a Roth Contributory IRA prior to 59.5 years of age, you can always withdraw any directly contributed funds without penalty. You just can’t withdraw any investment gains as those would be penalized 10%.

For example, say you’ve contributed $10k directly over the years and have made a $2k gain on your investment. Feel free to take out up to $10k without any repercussions. However, if you want to take out your additional $2k early, expect to pay roughly $200 in penalties to do so.

Who can benefit from a Roth Contributory IRA?

Since the primary difference between Roth Contributory IRA and a Traditional IRA is when you get taxed, different people can benefit from each.

If you are someone who will be making and spending more money in the future than right now, a pre-taxed account like Roth Contributory IRA would be best.

If you are someone who will be spending less money in retirement, a Traditional IRA may work better for you.

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