If you’re a physical therapist or occupational therapist looking to save and invest some of your money to put towards your eventual retirement, you may want to consider opening your own Roth IRA account.
But before you do, this article will answer many questions you probably have about a Roth IRA such as
- What is a Roth IRA?
- Who is eligible for a Roth IRA?
- How much can I contribute to a Roth IRA?
- What are the tax benefits of a Roth IRA?
- When can I contribute to a Roth IRA?
- Can I have both a traditional IRA and a Roth IRA?
- Where can I open a Roth IRA account?
- When can I make withdrawals from a Roth IRA?
- And much more. . .
Ready to learn about the Roth IRA retirement plan?
Let’s get started.
What Is An IRA Plan?
There are several different types of plans that you may or may not be eligible to use to save and invest towards your eventual retirement.
The IRAs, or “Individual Retirement Accounts,” are one category of retirement plans. This category includes
- The Traditional IRA
- The Roth IRA
- The SEP IRA
- The SIMPLE IRA
Covering all of these different IRAs in this reading would make this quite a long article. That’s why I’ve covered each IRA type in their own separate articles. You can access these reading by clicking on the IRA you are interested in above.
This article will focus just on the Roth IRA, an Individual Retirement Account with special tax benefits and other valuable characteristics that will be covered here.
Who Is Eligible For A Roth IRA?
The IRS will allow you to open and contribute to a Roth IRA if you meet both of these qualifications:
- Generate “Earned Income”
- Fall Below The Income Limits
1. Generating Earned Income
The IRS considers “earned income” to be money you make from working a job. Money you may collect from owning rental properties, from dividends on your investments, or from Social Security do not count as earned income.
Therefore, if you make money working a physical therapy or occupational therapy job, you can qualify to open your own Roth IRA.
It doesn’t matter if you work as an employee or if you are self-employed. And it doesn’t matter if you already have another retirement account such as a 401(k) or a 403(b) – you can still open and contribute to a Roth IRA account.
2. Qualifying Income Limits
The IRS will only allow you to contribute to a Roth IRA if your Modified Adjusted Gross Income (MAGI) does not surpass a certain threshold and that threshold depends on how you file your taxes (ie as single, married jointly, etc). These thresholds can change each year depending on the IRS’s discretion.
The IRS offers Worksheet 2-1 that you or your tax professional can use to calculate your MAGI and determine if you qualify to make contributions to a Roth IRA.
If you find that you fall into a category where you can only contribute a reduced amount to a Roth IRA, then the IRS offers Worksheet 2-2 to help you calculate what that reduced amount it. The IRS even provides you with an example of this worksheet already completed to help guide you.
Here are the details on the MAGI thresholds from the IRS for year 2023:
Filing Taxes As Single:
- If your MAGI is less than $138,000 then you can contribute up to the annual limit
- If your MAGI is $138,000 or greater but less than $153,000 then you can contribute to a Roth IRA at an amount that is less than the annual limit
- If your MAGI is $153,000 or greater then you cannot contribute to a Roth IRA
Filing Taxes As Married Filing Jointly:
- If your MAGI is less than $218,000 then you can contribute up to the annual limit
- If your MAGI is $218,000 or greater but less than $228,000 then you can contribute to a Roth IRA at an amount that is less than the annual limit
- If your MAGI is $228,000 or greater then you cannot contribute to a Roth IRA
Filing Taxes Married Filing Separately And You Don’t Live With Your Spouse:
- If your MAGI is less than $138,000 then you can contribute up to the annual limit
- If your MAGI is $138,000 or greater but less than $153,000 then you can contribute to a Roth IRA at an amount that is less than the annual limit
- If your MAGI is $153,000 or greater then you cannot contribute to a Roth IRA
Filing Taxes Married Filing Separately And You Do Live With Your Spouse:
- If your MAGI is less than $10,000 then you can contribute to a Roth IRA at an amount that is less than the annual limit
- If your MAGI is $10,000 or greater then you cannot contribute to a Roth IRA
Can My Spouse Who Doesn’t Earn Income Also Have A Roth IRA Account?
Yes!
I know, I know – We just covered how you must have “earned income” in order to open a Roth IRA.
But, the IRS makes an exception in the case of a spouse who does not earn income by allowing them to have what is commonly referred to as a “Spousal IRA.”
The term “Spousal IRA” is just used to describe how that IRA account actually belongs to your spouse even though it is your income that is allowing it to be opened and how it is your income that is funding it. When you go to open a Spousal IRA account, you can choose to make it either a traditional IRA account or a Roth IRA account.
The IRS does require that your income at least matches the combined amount that you contribute to your IRA and your spouse’s IRA. For example, if you contribute $4,000 to your Roth IRA and $4,000 to your spouse’s Roth IRA, then your income must be at least $8,000 for that year.
How Much Can I Contribute To A Roth IRA?
In year 2023, you can contribute up to $6,500 to a Roth IRA.
Each year the IRS decides if they will adjust this amount in order to keep pace with inflation.
One additional rule to note that won’t affect most Money Mobilizer readers but should still be stated: You can’t contribute more than your income if your income is less than the annual limit. So, in 2023, if you only made $5,000 then you can’t contribute more than $5,000 to your Roth IRA that year even though the annual limit is $6,500.
Can More Be Contributed To A Roth IRA If I Didn’t Contribute Very Much Early On?
Yes!
If you are 50 years or older, for year 2023, the IRS allows you to contribute an additional $1,000 to your Roth IRA.
I other words, a physical therapist or occupational therapist in this age group can contribute up to $7,500 to their Roth IRA in year 2023.
How Do Taxes Work With A Roth IRA?
The money you contribute to a Roth IRA is after-tax and therefore not tax-deductible.
This means that you have already paid taxes on the money you are contributing to your Roth IRA so your contribution does not qualify to get you a tax deduction.
However, the money you contributed can then be invested and, as it hopefully grows, you will not have to pay taxes on it as long as that money stays inside of your Roth IRA account. Even money you may earn from dividends on your investments are not taxed.
Then when the time comes to withdraw money from your Roth IRA, likely when you are retired, you will not have to pay taxes on that money as long as you follow the IRS’s rules regarding making qualified withdrawals – more on this later on in “Are There Any Rules For Withdrawing Money From A Roth IRA?”
Can I Have Both A Roth IRA And A Traditional IRA And Contribute To Both?
Yes, you can have both a Roth IRA and a traditional IRA and you can even contribute to both in the same year.
Some may consider doing this to be a good strategy in diversifying the taxation of your retirement assets.
Just keep in mind that the combined amount that you contribute to these accounts cannot exceed the limit set forth by the IRS for that year.
In other words, since the annual contribution limit in 2023 is $6,500 (if you are younger than 50 years of age), the amount that you contribute to your Roth IRA and the amount you contribute to your traditional IRA must add up to be no greater than $6,500.
When Can I Open A Roth IRA?
You can open a Roth IRA account at any time as long as you meet the eligibility requirements previously discussed.
When Can I Contribute To A Roth IRA?
You can make contributions to your Roth IRA account up until the due date for filing your taxes.
For example, you can make contributions to your Roth IRA up until April 15, 2024 for year 2023.
Where Can I Open A Roth IRA?
One of the best attributes of a Roth IRA plan is that you get to choose where to open your Roth IRA account.
If you are eligible to open a Roth IRA, you can do so at most brokerage firms, credit unions, and banks.
Before opening a Roth IRA, though, be sure to shop around and learn what fees and investment options you can expect from each financial institution. Investment options are discussed in more detail in “Do All Roth IRAs Have The Same Investment Options and Fees?”
Do All Roth IRAs Have The Same Investment Options And Fees?
No.
When deciding where to open your Roth IRA account, you should not only ask about the types and amounts of fees you should expect to pay but also the types of investments you will have access to.
Common investment options can include stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs).
If you’d prefer more exotic investment options, though, a self-directed Roth IRA may be of interest to you. These typically come with more fees, though. If you do go this route, be sure to still follow the IRS’s rules such as not investing in art, antiques, gems, coins, or alcohol.
Even if you don’t go the self-directed route, you can still choose to use a brokerage that can provide you with some form of investment guidance. This can come in the form of a robo-investor or an actual human broker. Both of these typically come with additional fees, though.
If you want to keep fees lower, then keeping things simple may be the best strategy for you. Brokerages that typically have access to low-cost mutual fund and ETF options and allow you to manage your money online include Vanguard, Fidelity, or Charles Schwab.
Is The Money In My Roth IRA Safe?
The Federal Deposit Insurance Corporation (FDIC) insures the total of your retirement account assets, including your Roth IRA balance, up to $250,000 only if your Roth IRA is at an FDIC insured bank.
Can I Take Out A Loan On My Roth IRA?
No.
The IRS does not allow you to borrow from a Roth IRA.
Are There Any Rules For Withdrawing Money From A Roth IRA?
The IRS has several important rules that you must follow when making withdrawals from your Roth IRA account. These rules are based upon how long you’ve had your Roth IRA account open and how old you are when making a withdrawal.
The IRS has a very helpful flow chart, Figure 2-1, illustrating these rules. For simplicity, the major concepts from this flow chart are outlined below to better help you understand your own personal scenario:
Scenario #1: You’ve Had Your Roth IRA Account Open For Less Than 5 Years
You can withdraw the amount you contributed to your Roth IRA penalty free at any age.
However, since your Roth IRA account has not been open for at least 5 years yet, the IRS sees a withdrawal of your contribution’s earnings as a “premature withdrawal” and therefore they can make you pay income tax on the amount of earnings you withdraw and also hit you with an additional tax penalty of 10% on the amount of earnings you withdraw.
Scenario #2: You’ve Had Your Roth IRA Account Open At Least 5 Years But You’re Younger Than 59 ½ Years Of Age
You can withdraw the amount you contributed to your Roth IRA penalty free at any age.
And since you’ve had your Roth IRA account open for at least 5 years, the earnings you withdraw can avoid being both taxed and hit with the 10% tax penalty if you plan to use the money you withdraw for one of the following:
- Withdraw up to $10,000 to purchase or rebuild your first home (additional rules apply)
- A physician determines that you are either mentally or physically disabled
- If the money withdrawn is going to your beneficiary because you passed away
If you don’t meet one of the above, though, then the earnings you withdraw can both be taxed and hit with the 10% tax penalty.
Scenario #3: You’ve Had Your Roth IRA Account Open For At Least 5 Years And You’re At Least 59 ½ Years Of Age
Since you’ve had your Roth IRA account open for at least 5 years and you’re at least 59 ½ years old you can withdraw both your contributions and your earnings without incurring either a tax or the 10% penalty.
Do I Need To Take A Required Minimum Distribution?
Required Minimum Distributions (RMDs) are annual withdrawals the IRS requires be taken once the account holder turns a certain age.
RMDs are not required for a Roth IRA plan until you pass away – then your beneficiaries will have to take RMDs.
Final Thoughts. . .
The Roth IRA can be a great retirement plan option for many Money Mobilizer readers.
One of my favorite aspects of the Roth IRA is that you can decide where you want to open your Roth IRA account. This gives you much more power over the investment options you have at your disposal.
And although you don’t get a tax deduction for your contributions, you do get to invest your money and then potentially withdraw it all tax-free as long as you are making qualified withdrawals – and you can withdraw your contributions at any age.
Or, if you prefer, you can just let the money you have in your Roth IRA sit and hopefully continue to grow further since there are no RMDs until you pass away. This can make the Roth IRA an appealing option for leaving money to loved ones in the event of your eventual passing.
That said, qualifying to contribute to a Roth IRA can pose a problem if your Modified Adjusted Gross Income surpasses the IRS thresholds.
And the Roth IRA’s contribution limit does leave a lot to be desired. At only $6,500 in year 2023, you can find much higher annual limits with other retirement plan options.
However, if you have a spouse who does not earn income then you can open a Spousal IRA account for him or her and fund it with your own income. If you combine finances as a couple, this essentially doubles your Roth IRA savings by having one account for each of you.
Overall, the Roth IRA is a retirement plan that should be considered by all physical therapists and occupational therapists at least as a supplement to another retirement plan with a higher contribution limit.
