What Is a 408a IRA and How Does a Roth IRA Work?

The term “408a IRA” refers to Section 408A of the Internal Revenue Code, which authorizes the account commonly known as a Roth IRA. Section 408A was added by the Taxpayer Relief Act of 1997, which established this new type of individual retirement arrangement to complement the traditional IRA.

Unlike a traditional IRA, a Roth IRA is funded with after-tax dollars, meaning you do not receive a tax deduction for your contributions. The primary benefit of this structure is that the funds within the account can grow tax-free. When you take money out in retirement, qualified distributions are not subject to federal income tax, which offers a source of tax-free income.

Establishing and Funding a Roth IRA

To contribute to a Roth IRA, an individual must have earned income and fall within specific income thresholds set by the Internal Revenue Service (IRS). These limits are based on your Modified Adjusted Gross Income (MAGI). For the 2025 tax year, a single individual can make a full contribution if their MAGI is less than $150,000, with contributions phasing out completely once MAGI exceeds $165,000. For married couples filing a joint tax return, the full contribution is allowed for a MAGI up to $236,000, with the ability to contribute phasing out entirely at a MAGI of $246,000.

The amount you can contribute annually is also capped. For 2025, the maximum contribution to a Roth IRA is $7,000 for individuals under the age of 50. This limit applies to the total contributions you can make across all of your IRA accounts, both Roth and traditional.

Individuals who are age 50 or over are permitted to make an additional “catch-up” contribution. For 2025, this additional amount is $1,000, bringing the total potential contribution for this age group to $8,000.

You have until the tax filing deadline for a given year to contribute, which is April 15 of the following year. This deadline does not include any filing extensions. For example, you can make contributions for the 2024 tax year up until April 15, 2025, giving you additional time to fund your account after the calendar year has concluded.

Withdrawing Funds from a Roth IRA

Withdrawals from a Roth IRA are subject to ordering rules that determine their tax consequences. The first dollars distributed are always considered a return of your direct contributions. After all of your contributions have been withdrawn, the next funds to come out are any amounts that were converted from other retirement accounts, such as a Traditional IRA. The last money distributed is the investment earnings.

Because you funded the Roth IRA with after-tax money, you can withdraw your direct contributions at any time, at any age, and for any reason without paying taxes or penalties. You have already paid income tax on this principal amount, so the IRS allows you to access it freely. This makes the contributed portion of a Roth IRA a potential source for emergency funds.

For the earnings portion of your account to be withdrawn tax-free and penalty-free, the distribution must be what the IRS defines as a “qualified distribution.” Two conditions must be met for a withdrawal of earnings to be considered qualified. First, you must have held a Roth IRA for at least five years, a period that begins on January 1 of the first year you ever contributed to any Roth IRA.

The second condition for a qualified distribution is that you must meet a specific qualifying event. The most common event is reaching age 59½. Other qualifying events include becoming permanently disabled or using the funds for a first-time home purchase, which has a lifetime limit of $10,000. If both the five-year rule and a qualifying event are met, the earnings you withdraw are free from federal income tax and early withdrawal penalties.

If you withdraw earnings before meeting the requirements for a qualified distribution, that portion of the withdrawal is a “non-qualified distribution.” These distributions are subject to ordinary income tax on the earnings portion of the withdrawal. Additionally, if you are under age 59½, you will face a 10% early withdrawal penalty on the earnings, unless you qualify for a specific exception.

Converting to a Roth IRA

A Roth conversion is a transaction that moves funds from a pre-tax retirement account, such as a Traditional IRA or 401(k), into a post-tax Roth IRA. This process allows individuals who are not eligible to make direct contributions due to income limits a path to fund a Roth IRA. There are no income limitations that restrict who can perform a conversion.

The amount you convert from a pre-tax account is treated as taxable income in the year the conversion occurs. For example, if you convert $50,000 from a Traditional IRA to a Roth IRA, you must add that $50,000 to your taxable income for that year. This increases your tax liability, so it is important to plan for this tax bill, often by setting aside funds outside the retirement account to cover the taxes.

The tax calculation becomes more complex if you hold both pre-tax and after-tax (nondeductible) contributions within your Traditional IRA accounts. In this situation, the “pro-rata rule” applies. This rule prevents you from selectively converting only the after-tax funds to avoid taxation. The IRS requires you to determine the taxable portion of your conversion by considering the proportion of pre-tax funds to the total value of all your Traditional IRAs combined.

To illustrate the pro-rata rule, imagine you have a total of $100,000 across all your Traditional IRAs. Of this amount, $80,000 is from pre-tax contributions and earnings, and $20,000 is from after-tax, nondeductible contributions. This means 80% of your total Traditional IRA balance is pre-tax. If you convert $25,000 to a Roth IRA, you cannot designate it as coming solely from the after-tax portion. Instead, 80% of that $25,000 conversion, or $20,000, would be considered taxable income, while the remaining $5,000 would be a tax-free return of your after-tax basis.

Required Tax Reporting

Financial institutions report IRA activities to the account holder and the IRS using specific forms. When you contribute to a Roth IRA, your custodian sends you Form 5498, IRA Contribution Information, in May of the following year. This form details all contributions and conversion amounts. You do not file this form with your tax return but should retain it for your records.

When you take money out of an IRA as a regular distribution or a conversion, the financial institution issues Form 1099-R. This form is sent to you and the IRS in January following the year of the distribution. It reports the gross amount of the distribution and is used to report the transaction on your income tax return.

You are responsible for filing Form 8606, Nondeductible IRAs, with your federal tax return for certain transactions. This form is necessary if you make nondeductible contributions to a Traditional IRA, take distributions from an IRA that has a basis in nondeductible contributions, or convert any of these accounts to a Roth IRA. It is the form used to calculate the taxable portion of a Roth conversion when the pro-rata rule is a factor.