Three Ways a Roth IRA Could Be for More than Retirement

Estimated reading time: 3 minutesWhen people think about IRAs, they typically associate them with retirement. After all, that is what they were designed for. However, some investors don’t realize that funds from a Roth IRA can be used for other expenses that may arise before retirement. Below we will explain the three main categories people use their Roth IRA funds for besides retirement.

College Expenses

Student debt is now the second leading consumer debt category in the country, right after mortgage debt. The bill on student debt is even higher than for credit card or car loan debt! With the high interest rates student debt attracts, it can sometimes feel as if student loans will never be payed off.

Luckily, funds from a Roth IRA can be used to pay for school expenses, and some parents use their IRAs as a backup college fund for their child. If the child doesn’t attend college, or they have other means of paying for school, then the parents still have that money for their retirement. Although savers can pull contributions out penalty-free after the account has been open for 5 years, higher education expenses still count as a qualified distribution, so account owners don’t have to worry about paying a penalty if they don’t meet the distribution requirements. Funds can be used for the plan owner, their spouse, their children, or their grandchildren.

First-Time Home Purchase

Another exception for the early distribution rule is for first-time home purchases, builds, or rebuilds. If both spouses own an IRA and are both first-time home buyers, they could each pull $10,000 from their accounts for a total of $20,000 for their new home. The term “first-time home buyer” is slightly misleading, though. As long as one or both spouses have not owned a home for two years prior to the home purchase, they count as first-time home buyers. However, there is a $10,000 lifetime limit to this loophole for each individual, so buyers can’t take advantage of their retirement accounts forever.

Emergency Fund

Instead of contributing to a traditional savings fund, where the interest gained is pennies for every thousand dollars, some people use their Roth IRA as a place to hold and quickly grow an emergency fund. Roth IRAs typically have better returns than savings accounts, but it may take longer to receive the actual funds if an emergency arises. In this case, it’s wise to have 3-6 months’ worth of accessible funds available for short-notice emergencies and save the rest into a Roth. This way, you can still benefit from higher gains and have a bigger retirement account if you don’t end up using the funds in the Roth for an emergency.

While most financial advisors would recommend not touching retirement money until retirement, there are special circumstances that may cause one to consider using Roth funds for other purposes. Always consult a financial expert before moving money around or pulling from your Roth IRA to avoid any unnecessary penalties.

What is the Age Requirement to Contribute to a Roth IRA?

Estimated reading time: 3 minutesWith all of the different age limits and contribution limits on the various retirement accounts, it can be confusing keeping track of everything. Roth IRAs are a bit different than Traditional IRAs, including the contribution age limits. Read on to discover when and how much you can contribute to a Roth IRA.

Minimum Age Limit

Surprisingly, there is not a minimum age limit to Roth IRA contributions. The caveat, however, is that the owner of the account must earn taxable income in order to contribute to one. So, no, you can’t start one for your newborn grandchild. Once they start earning income, however, they can open and contribute to one. Unfortunately, their allowance for household chores doesn’t count as income in this sense. Typically, they will need to prove they were on payroll somewhere in order to count it as taxable income. If you owned a business and included them on your payroll for work they performed for the business, then this is usually deemed acceptable. Always double check with your local financial advisor first before employing this strategy.

Starting a Roth IRA for a teen’s first job is one of the wisest choices they can make with those dollars. Not only will their retirement money grow tax-free, but it can also grow to a couple hundred thousand dollars by the time they reach retirement age. Not to mention, they have the most expendable income at this age due to their lack of bills and other responsibilities. One of the “downsides” to this, however, is that they will have unlimited access to these funds once they reach age 18. If you want more control over when they can access their funds, a trust fund or naming them as a beneficiary on your own retirement account may be better options.

Remember, though, they can only contribute the maximum amount every year ($6,000 for 2021), or up to the amount they earned if it was less than $6,000. So, if they made $3,000 from their part-time fast-food job this year, they can only contribute up to $3,000 into their Roth IRA.

Maximum Age Limit

Unlike Traditional IRAs, there is actually no maximum age limits for contributions to a Roth IRA. As long as you are earning taxable income, you can contribute to your Roth—even if you’re 95! Contribution limits still apply. If you don’t have an income, but your spouse does, they can make contributions with their income into a Spousal IRA for you.

Also, you can make perform a rollover to a Roth IRA at any age, regardless of income. If you want to roll over funds from a Traditional IRA once you reach the minimum age for required minimum distributions on that account, you can. Just be aware that you may need to pay taxes on the funds rolled from a Traditional to Roth IRA, so always consult your financial advisor before making any moves. Due to restricted recharacterization laws, owners are no longer permitted to recharacterize a Roth rollover. Once you roll over, there’s no going back. Just another reason to consult your advisor before moving funds!

How Much Can You Contribute to A Roth IRA?

Estimated reading time: 2 minutesEvery once and awhile the IRS increases contribution limits or income limits for Roth IRAs. This year, while contribution limits are staying the same, income limits have increased for who is eligible to contribute to a Roth IRA. For 2021, eligible participants may contribute up to $6,000 toward their Roth IRA. If you are older than 50 you can contribute up to $7,000. Contributions can be made anytime until the tax filing deadline.

Earned Income Nuances

Earned income is defined as anything you made from salary, hourly pay, or profits from a small business. Basically, if it’s taxable it counts as earned income. If your earned income happens to be less than $6,000, you may only contribute up to the full amount of your earned income, not the full $6,000. Even if you make no money but your spouse does, you can set up a Spousal IRA and contribute the full $6,000 to both accounts as long as your spouse earns more than $12,000 in a year.

Contribution Strategies

There are a couple of different options when it comes to making contributions. You can contribute the full amount in one payment at any time during the eligible window. Another strategy is what’s called dollar-cost-averaging. This is where you spread your contributions out over the course of the year, whether that’s monthly or quarterly, to average your risks and rewards. By spreading out the contributions you may buy shares when they are priced low or high, but it will average your cost in the end. Since it’s difficult to know when prices will be low, if you contribute all at once, you may be unwittingly buying shares at their highest price point. Dollar-cost-averaging minimizes that risk.


When converting funds to a Roth IRA, there are no contribution or income limits. Therefore, if you already opened a Roth account while you were eligible, you can roll over funds from another account into your Roth, no matter the amount. If you are no longer eligible for contributing directly to a Roth, you can use the “backdoor Roth” strategy to benefit from tax-free distributions at retirement. Keep in mind, however, that you will need to pay taxes on any untaxed funds converted and the funds may count as earned income that could bump you to a higher tax bracket. Always consult your financial advisor before converting funds from one account to another.

When Can You Withdraw from A Roth IRA?

Estimated reading time: 3 minutesAlthough it’s best to wait until retirement to use your retirement funds, so you fully benefit from the compounded interest made on your funds, there are times when you may need to make a withdrawal to cover an unexpected expense. Roth IRAs are different from Traditional IRAs when it comes to withdrawal rules, so you will want to understand to rules and regulations related to Roth IRAs before taking out funds. Taking too much, for instance, could result in additional taxes and penalties. Here is a basic outline explaining when you can withdraw, and how much, from a Roth IRA.

Before age 59 ½

If you are younger than the age of retirement, you can still take withdrawals, but you will be limited on how much you can take. Roth IRA owners are allowed to make withdrawals on their contributed funds tax-free and penalty-free at any time. However, withdrawals on earnings will be subject to both taxes and penalties. For instance, if you have only had your account for one year, you made $5,000 in contributions, and it appreciated to $5,200, you could only withdraw the $5,000 without taxes or penalties.

If you are planning on withdrawing more than just your combined contributions, there are a few points to keep in mind. First, the five-year rule may save you from having to pay penalties or taxes. If you have had your Roth IRA account for more than five years, you won’t have to pay a penalty on your earnings withdrawal. Below age 59 ½, you will still be subject to paying taxes on your earnings withdrawal unless you meet any of the following criteria:

    • You use the funds for a first-time home purchase—up to $10,000 lifetime maximum
    • You pass away or become disabled
    • You use the funds to pay for unreimbursed medial expenses exceeding 10% of your AGI (7.5% for 2017-2018)
    • You use the funds to pay for medical insurance after losing your job
    • You use the funds to pay for higher education tuition for you, your children, or your grandchildren
    • You use the funds as a qualified disaster recovery assistance
  • The withdrawal is part of a substantially equal periodic payment plan—lasting for at least five years.

If you have had your account for fewer than five years, then you will still be subject to taxes, but not penalties on your earnings if you meet the above requirements.

Ages 59 ½ to 70

Again, Roth IRA plan holders can take distributions on their contributions at any time. However, within this window of time, you may be subject to taxes but not penalties on earnings if you have had your account for fewer than five years. After age 59 ½, if you have had your account for more than five years, you can take withdrawals on earnings without any taxes or penalties.

Age 70 ½ and older

If you have had your account for fewer than five years, withdrawals on earnings will be subject to taxes but not penalties. If you have had your account for more than five years, then you can withdraw earnings without paying any taxes or penalties.

Roth Conversions — Who, Why, and How

Estimated reading time: 5 minutesWhen setting up a retirement account, there are many decisions you need to make. Do you want to set up a tax-deferred Traditional IRA or a Roth IRA with tax-free withdrawals or both? Do you want to set up your retirement plan with a traditional custodian and invest in mutual funds or other publicly held assets, or with a custodian that allows you the flexibility to invest in alternative assets like real estate, promissory notes, and private placements? Down the road, you may discover that a different account will better meet your needs. For instance, if you are predicting a high return on your real estate investment in your traditional IRA, you might want to consider a Roth conversion and pay taxes on the money now before it grows. Below are some considerations to evaluate if a Roth conversion is right for you.

What is a Roth Conversion and Who Qualifies?

A Roth conversion is basically the movement of funds or assets from a traditional IRA or other pre-tax account to a Roth IRA, an after-tax account. While there is an income limit on the ability to contribute to a Roth IRA, there is no income cap on Roth conversions, so anyone, even high-income earners can convert their assets into a Roth. However, just because there are no limitations to who can do a Roth conversion, doesn’t mean that it makes sense for everyone.

Why Convert?

Tax Free Growth – With a traditional IRA, you may benefit from tax deductible contributions now, but you will have to pay income tax on all distributions later on. You will also be required to take a yearly distribution once you reach age 73. With a Roth IRA, you have to pay income tax on your contributions now, but aren’t subject to a tax on withdrawals once you reach age 59½. While you aren’t required to take a yearly distribution for a Roth IRA, you still have to leave your funds in your account for at least five years before taking any distributions to avoid penalty, even if you’ve reached the 59½ mark. Depending on your income level now and what you expect your income level at retirement to be, a Roth conversion could make sense for you.

Because you will be taxed on any converted funds coming out of your traditional IRA and won’t be taxed later on distributions from a Roth, it generally makes more sense to convert if you are in a lower income tax bracket now than what you expect to be at retirement. If you are in your peak earning years, the taxes you pay on your conversion will be higher than the taxes you would owe at retirement when you start your traditional IRA distributions. If you think you’ll be in the same tax bracket at retirement as you are now but think congress will raise the income tax by the time you reach retirement, it also may make sense to convert to a Roth now. It’s important to discuss these scenarios with a qualified tax advisor before making a decision.

Backdoor Roth – If you want to contribute to a Roth, but are ineligible because of income limits, you can contribute to your traditional IRA and then convert it to your Roth IRA. This strategy allows high earners to still fund their Roth IRA even when they can no longer make regular contributions to it.

Estate Planning – Another reason why someone would want to convert is if they were planning on entrusting the IRA to children or grandchildren upon death. This way, the inheritors wouldn’t owe income taxes on the funds and could withdraw any time as long as the account met the five-year requirement.

How Does it Work?

The process to convert your funds from a tax deferred account to a Roth is pretty straightforward. Just contact the custodian where the funds are held, and they can walk you through the process. At Quest since we work with self-directed IRAs, the conversion usually requires moving assets such as real estate. Clients would complete a Roth Conversion Form and provide supporting documentation depending on what type of asset is being converted.

With a Roth Conversion, you will be responsible for taxes on any money from your traditional IRA that hasn’t been taxed. The converted amount will be added to your taxable income for the tax year the conversion occurs, so it may bump you into a higher tax bracket resulting in paying a higher tax rate.

There are no restrictions on how much you can convert or how many times you can convert, but you do want to consider the tax consequences. If you are going to be in a lower tax bracket for a few years, you can make a conversion each year that doesn’t bump you up to the next tax bracket and save even more on taxes with this method. Deciding whether it’s appropriate to convert to a Roth from your traditional IRA should be evaluated every year. For example, if your income varies significantly from year to year, then you may want to target a relatively low-income year as one in which a conversion may be appropriate.

What to Consider Before You Convert?

  • The deadline for converting your traditional IRA to a Roth IRA is December 31st. Don’t confuse this with the deadline to contribute to a Roth IRA, April 15th.
  • If you need to take a required minimum distribution the year you convert, you must take the distribution before you move any funds.
  • If you are younger than 59½ and use IRA funds to pay for the conversion tax, you will be subject to a 10% tax penalty. It is suggested that you use another source to pay for the tax to avoid unnecessary penalties.
  • Beware of the five-year rule: converted funds cannot be withdrawn until they have been in the account for five years, or you will incur a 10% early withdrawal penalty.
  • Even though you may qualify for a Roth conversion, there are still income restrictions on direct contributions to the account.
  • Any post-tax funds in your IRA aren’t eligible for conversion.

When retirement planning, it’s important to weigh the potential benefits and drawbacks when choosing what type of account should hold your investments. Converting IRA funds to a Roth IRA may be beneficial to you in the long run, but it is recommended that you talk with a financial advisor regarding your individual situation before making any final decisions. If you are interested in learning more about self-directed Roth IRAs and alternative investments, you can schedule a 1 on 1 with an IRA Specialist.