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Max That Roth! (Yet Again)

Written by Nickel - 10 Comments

I’ve said it before (twice), and I’ll say it again…

This coming Tuesday, April 17th, marks the cutoff for IRA contributions for the last year. And I’m here to tell that if there’s anyway possible that you might have the money to contribute to a Roth IRA before the deadline, then you should seriously think about it. You see, non-rollover contributions to Roth IRAs can be withdrawn at any time, for any reason, without taxes or penalties. Don’t believe me? Check out IRS Publication 590 for details. See also Fairmark.com (here and here). Or read my handy-dandy primer on withdrawing Roth IRA contributions.

Here’s a particularly pertinent snippet from the latter Fairmark page:

In most cases the best strategy is to leave as much money in your IRA as you can, and for as long as you can. But if you need early access to that money, you’re generally in better shape with a Roth IRA than with a regular IRA. You’re allowed to withdraw your non-rollover contributions at any time without paying tax or penalty. This is not the case for the earnings, however. Unless you meet the tests described below, a withdrawal of earnings will be taxable — and may be subject to a penalty as well.

In general terms, the ability to pull money out of a retirement account on whim might be viewed as a bad thing. After all, you don’t want to be able to raid your retirement to buy that new Jet Ski, do you? But the ability to pull your money out of a Roth does give you the flexibility to hedge your bets and make that contribution even if your not sure that you can afford it right now.

Since you can only contribute a limited amount per year, savvy savers shouldn’t pass up an opportunity to stuff their IRAs full of money. Of course, you need to make sure that you don’t lock up dollars that you’ll end up needing — it’s always good to have money socked away in a rainy day account. And therein lies the beauty of the Roth IRA contribution/withdrawal rules…

Go ahead and make that contribution and think about it later. If it turns out that you car doesn’t break down, you don’t lose you job, and nobody in your family gets sick (or worse) before you have a chance to rebuild you rainy day fund, then you’ve just come out way ahead. And if the worst does happen, you can always yank that money back and put it toward whatever emergency just came up.

A few things to watch out for:

(1) Make sure you do this with a Roth IRA, not a Traditional IRA. The withdrawal rules are different between the two.

(2) Make sure you don’t exceed you contribution limits. The IRA limits are for the combined total of Roth and Traditional contributions. Thus, if you’ve already contributed to a Traditional IRA, you’ve effectively reduced (or even reached) your limit.

(3) Make sure that a Roth is right for you. In general terms, if you expect to pay the same or higher taxes at retirement than you do right now, then a Roth probably makes sense. If you expect your tax burden to fall, however, it might be better to contribute to a Traditional IRA (assuming that you qualify for the deduction). Here again, keep in mind that the Traditional IRA doesn’t offer the same level of flexibility.

Published on April 12th, 2007
Modified on February 19th, 2008 - 10 Comments
Filed under: Retirement, Saving & Investing, Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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10 Responses to “Max That Roth! (Yet Again)”

  1. 1
    limeade Says:

    This is one of my favorite aspects of the Roth. As I wrote about here, once I have enough in the roth I can see myself pulling money out to put down on a rental property.

    It’s nice to leave your options open.

    -limeade

  2. 2
    Blaine Moore Says:

    I maxed my roth last year, but my wife isn’t interested right now. She wants to leave the money in our emergency fund.

    Oh well. I plan on maxing my roth going forward.

  3. 3
    Bags Says:

    I feel like I should contribute for 2006 considering I can come up with the money, but let me ask a question. If I do this now I would have to make an amendment to my taxes considering I already submitted them, right?

  4. 4
    nickel Says:

    Bags, that’s an excellent question, and I’m not entirely sure of the answer. Since Roth contributions aren’t deductible, it won’t change your bottom line, but I seem to recall that you still report your contributions for record-keeping purposes.

    Even if you have to amend your return, I don’t think it has to be done by Tuesday (but the Roth contribution does have to be done by then), but I might be wrong.

  5. 5
    jpsfranks Says:

    Roth IRA contributions are not reported and do not affect your tax return, so there is no problem contributing after you have already filed and no amendment is necessary.

    Conversions, recharacterizations, and distributions all have tax consequences, however.

  6. 6
    Tinyhands Says:

    The important thing is that the contribution is made before the deadline AND that the custodian recognize that it is for 2006.

  7. 7
    CPA1298 Says:

    Regarding Bags – you don’t need to file anything on your taxes to indicate that you’ve made a Roth contribution. Also, you can amend your returns (for other reasons) for up to three years after the filing deadline.

  8. 8
    MM Says:

    I am a college student and this past year I didnt work much, but I still saved a bit of money, am I able to contribute to a Roth?

  9. 9
    CPA1298 Says:

    MM – you can contribute to a Roth if you had earned income. ‘Earned income’ only means income from a job. If you earned $2,000, you are eligible for a $2,000 Roth contribution. The maximum Roth contribution is $4,000 (at your age).

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