What are the restrictions on Roth IRA accounts?

Roth IRA accounts include contribution and income limits.

Investment Restrictions in Roth IRA Accounts

Roth IRA accounts are highly flexible, allowing investors to hold various types of assets, including stocks, bonds, exchange-traded funds (ETFs), mutual funds, and even real estate. However, specific rules apply to certain assets, and some types of assets cannot be owned in a Roth IRA at all.

For example, if an investor chooses to own real estate in a Roth IRA, they cannot live in the property or allow related parties such as parents, siblings, or children to benefit from it. The property must be strictly an investment. Additionally, you cannot transfer real estate to a Roth IRA by selling it to yourself or to a trust that you benefit from, and you cannot use the property in a Roth IRA as collateral for a loan.

Assets that cannot be held in a Roth IRA include life insurance and collectibles such as antiques, art, rugs, gemstones, stamps, and alcohol.

Five-Year Withdrawal Rule for Roth IRA

One of the advantages of Roth IRA accounts is that you can withdraw your contributions from the account without paying taxes or penalties, even if you haven’t yet reached retirement age. Once you reach age 59 and a half, you will enjoy full benefits from the account and can withdraw contributions and earnings without paying taxes or penalties.

The exception is if you have had a Roth IRA for less than five years. Roth IRAs require a five-year waiting period from the time the account is opened before you can make unrestricted withdrawals.

If you are under age 59 and a half and withdraw funds from a Roth IRA, you will have to pay taxes and penalties unless you meet specific requirements, such as:

• Being completely and permanently disabled.
• Withdrawing up to $10,000 to buy your first home.
• Paying health insurance premiums during periods of unemployment.

If you are age 59 and a half or older and have a Roth IRA for less than five years, you will not incur penalties on withdrawals, but you will be required to pay taxes on your earnings.

Borrowing from a Roth IRA or Against It

IRS rules prohibit investors from using funds in Roth IRA accounts as collateral for loans. The penalty for violating this rule is that any amount used as collateral is considered a distribution, meaning you will pay taxes and penalties on it.

The IRS also prohibits borrowing money from your Roth IRA.

Other Prohibited Transactions

The IRS also prohibits other types of transactions in Roth IRA accounts, including improper use of the account by the owner, beneficiary, custodian, and family members. For example, the custodian cannot make changes to the plan’s income or assets for personal benefit.

Eligibility and Contribution Limits for Roth IRA Accounts

You must meet certain eligibility requirements to contribute to a Roth IRA. To contribute, you must have earned income for the year, and you cannot contribute more than you earned.

Income Requirements

If your income exceeds the specified limits, the amount you can contribute to a Roth IRA begins to decrease or phase out until it reaches $0.

Here are the income ranges for 2022 that apply to Roth IRA contributions:

• Single or Head of Household: Less than $129,000 – $129,000 to $143,999 – $144,000 or more.
• Married Filing Jointly: Less than $204,000 – $204,000 to $213,999 – $214,000 or more.

And while

The income limits for 2023 excluded for Roth IRA contributions:

• Single or Head of Household: Less than $138,000 – $138,000 to $152,999 – $153,000 or more.
• Married Filing Jointly: Less than $218,000 – $218,000 to $227,999 – $228,000 or more.

Note: If you are married and filing separately, the contribution amounts depend on income and whether you lived with your spouse for any part of the year.

Contribution Limits

Once you meet the income requirements to contribute to a Roth IRA, you will face limits on the amount you can contribute each year.

In 2022, you could contribute $6,000 for the year, and if you are age 50 or older, you qualify for an additional $1,000 contribution for a total of $7,000. In 2023, you can contribute $6,500, and if you are age 50 or older, you can contribute $7,500, including the additional contribution.

Frequently Asked Questions (FAQs)

What are the restrictions on MLP and REIT investments in a Roth IRA?

The IRS does not restrict investors from purchasing investments in Real Estate Investment Trusts (REITs) or Master Limited Partnerships (MLPs) in a Roth IRA, as long as they comply with other rules. For example, you cannot own a primary residence in your Roth IRA, even if it is part of a REIT you own.

When can you withdraw from a Roth IRA? You can withdraw funds from a Roth IRA without penalty only if you have held the account for at least five years and one of the following conditions applies:

• You are only withdrawing contributions, not earnings.
• You are age 59 and a half or older.

You can withdraw earnings without paying taxes before age 59 and a half in some cases, such as:

• You withdraw up to $10,000 to buy your first home.
• You spend the money on qualified education expenses.
• You become disabled.
• You spend the money on unreimbursed medical expenses or health insurance during unemployment.

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Sources:

• IRS. “Retirement Topics: Prohibited Transactions.”
• IRS. “Retirement Topics: Plan Assets.”
• IRS. “Issue Summary: Investments in Collectibles in Individually Directed Qualified Plans.”
• IRS. “Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs),” pages 31-32.
• Charles Schwab. “Roth IRA Withdrawal Rules.”
• IRS. “Contribution Limits for Roth IRAs for 2022.”
• IRS. “Contribution Limits for Roth IRAs for 2023.”
• IRS. “Retirement Topics: Roth IRA Contribution Limits.”

Source: https://www.thebalancemoney.com/what-are-roth-ira-restrictions-5224274