To avoid this, you fund a traditional IRA and then convert the money into a Roth. Under the apportionment rule, IRA conversions are taxed in proportion to the amount of taxable contributions on all of your IRA balances. Once the conversion is complete, the money in your Roth IRA becomes subject to the Roth IRA distribution rules. However, you can still contribute to a Roth IRA and make cumulative contributions to a Roth or traditional IRA, regardless of your age.
Under certain conditions, Roth IRAs also allow tax-free earnings to be withdrawn, which are taxable in a traditional IRA. People with traditional IRAs must begin receiving the required minimum distributions when they turn 72, but there is no such requirement for Roth IRAs. You may be able to get around income limits by converting a traditional IRA into a Roth IRA, which is called a clandestine Roth IRA. The five-year rule of the Roth IRA states that you cannot withdraw earnings tax-free until at least five years after you first contributed to a Roth IRA.
Using this definition of compensation, if your income exceeds the limit of a Roth IRA or is zero for a fiscal year, you will not be able to contribute to a Roth IRA during that year. The financial institution that maintains its contributions to a traditional IRA transfers them directly to the institution that holds its Roth IRA. Every year you make a contribution to a Roth IRA, the custodian or trustee will send you Form 5498, IRA Contribution Information. Yes, you can contribute to an IRA for a non-working unemployed spouse with whom you file a joint return, but your total combined contribution cannot exceed your joint taxable income or double the annual IRA limit, whichever is lower.
This and other key differences make Roth IRAs a better option than traditional IRAs for some people saving for retirement.