What Are the Roth IRA Rules Under IRC Section 408a?
Understand the official tax code behind the Roth IRA and how the specific rules in IRC Section 408a govern the way you save, grow, and use your money.
The legal framework for Roth Individual Retirement Arrangements (IRAs) is established under Section 408A of the Internal Revenue Code. Unlike traditional retirement plans, Roth IRAs are funded with after-tax dollars, meaning contributions are not tax-deductible. The contributions grow within the account, and investment earnings can accumulate without being taxed annually. When the owner eventually takes money out in retirement, these withdrawals, known as distributions, are completely tax-free if certain conditions are met.
Eligibility and Contribution Limits
An individual’s ability to contribute to a Roth IRA is governed by their income. The Internal Revenue Service (IRS) uses a figure called Modified Adjusted Gross Income (MAGI) to determine eligibility. MAGI is calculated by taking your Adjusted Gross Income (AGI) from your tax return and adding back certain deductions, such as student loan interest or tuition and fees.
These income thresholds are adjusted annually for inflation and create phase-out ranges. For 2025, a single individual’s ability to contribute is limited if their MAGI is between $150,000 and $165,000. For those who are married and file a joint tax return, the range is $236,000 to $246,000.
If an individual’s MAGI falls within this range, they can only make a reduced contribution. An income above the upper limit of the range makes them ineligible to make any direct contribution for that tax year.
For the 2025 tax year, the maximum annual contribution to a Roth IRA is $7,000. This limit applies across all of an individual’s IRAs, both Roth and Traditional, meaning one cannot contribute the maximum to each type of account separately.
Individuals age 50 or over are permitted to make an additional “catch-up contribution” of $1,000, bringing their total possible contribution to $8,000 for 2025. Contributions for a tax year can be made up until the federal tax filing deadline, which is typically in mid-April of the following year.
Rules for Withdrawing Funds
For a withdrawal to be a “qualified distribution,” meaning it is tax-free and penalty-free, it must meet two conditions. The first is the five-year rule, which requires that five taxable years have passed since the first contribution was made to any Roth IRA owned by the individual. This five-year clock starts on January 1 of the year the first contribution was designated for.
The second condition is that the account owner must meet a specific circumstance, such as reaching age 59½. Other qualifying events include the owner becoming totally and permanently disabled or using the funds for a first-time home purchase, which has a lifetime limit of $10,000. When both the five-year rule and a qualifying event are met, the entire distribution is free from federal income tax and penalties.
A “non-qualified distribution” does not meet these criteria, and its tax consequences depend on the source of the funds. The IRS mandates a specific ordering rule for withdrawals, and all of an individual’s Roth IRAs are treated as a single account for this purpose.
The first funds withdrawn are always direct contributions. Because they were made with after-tax money, they can be withdrawn at any time, for any reason, free of tax and penalties.
After contributions are depleted, withdrawals are taken from amounts converted from other retirement accounts. A separate five-year holding period applies to each conversion. If an owner under age 59½ withdraws converted funds before that specific conversion’s five-year period has passed, the withdrawal is subject to a 10% penalty.
The last money to be withdrawn is investment earnings. These earnings are subject to both income tax and a 10% early withdrawal penalty if the owner is under age 59½.
Converting to a Roth IRA
Individuals can move funds from pre-tax retirement accounts, like a Traditional IRA or a 401(k), into a Roth IRA through a conversion. This action has an immediate tax consequence. The amount being converted is included in the individual’s gross income for the tax year in which the conversion occurs.
An individual might convert funds during a year when their income is lower, placing them in a lower tax bracket. This allows them to pay income tax on the conversion at a reduced rate. The goal is to pay taxes now if the expectation is that their tax rate will be higher in retirement.
The conversion mechanism also provides a path for high-income earners who are ineligible to make direct contributions. This strategy, known as a “backdoor Roth IRA,” involves making a non-deductible contribution to a Traditional IRA and then converting it to a Roth IRA. Since the initial contribution was non-deductible, only the earnings would be taxable upon conversion.