If you’re looking for a tax-advantaged retirement account, you should consider a Roth IRA. Roth IRAs offer unique benefits that can be extremely helpful in saving for retirement. In this article, we will discuss how Roth IRAs work, the tax benefits they offer, and more!
What are Roth IRAs?
Roth IRAs are individual retirement accounts (IRAs) that allow withdrawals on a tax-free basis as long as certain conditions are met. (Technically, the IRS calls them Individual Retirement Agreements.) Roth IRAs are similar to traditional IRAs, with the biggest difference being how the two are taxed. With Roth IRAs you contribute after-tax dollars—this means you do not receive a tax deduction when you contribute money to a Roth IRA, but once you start withdrawing funds, you do not pay taxes on the withdrawals.
One of the biggest benefits of a Roth IRA is that it offers tax-free growth. This means that your investment can grow without being subject to taxes. Additionally, if you withdraw your money after meeting certain conditions (discussed below), you will not have to pay any taxes on your withdrawals.
Another benefit of a Roth IRA is that it offers more flexibility than a traditional IRA. With a Roth IRA, you are not required to take distributions at age 72 like you are with a traditional IRA. This can be beneficial if you want to keep your money invested for longer and let it continue to grow tax-free.
Roth IRA Eligibility
To be eligible to contribute to a Roth IRA, you must meet the following criteria:
-You must have earned income (this can include wages, salaries, tips, commissions, etc.)
-You must be below the age of 72
-Your modified adjusted gross income must be below a certain amount (this amount varies depending on your filing status)
If you meet the above criteria, you can contribute up to $6000 to a Roth IRA each year (or $ 7000 if you’re age 50 or older).
Allowable Investments in a Roth IRA
You are able to invest in a number of different things with a Roth IRA. Some of the most common investments include:
-Exchange-traded funds (ETFs)
Roth IRA Withdrawals
You are allowed to withdraw your Roth IRA contributions at any time without penalty. However, if you withdraw earnings from your Roth IRA before meeting certain conditions, you may be subject to taxes and penalties.
To avoid paying taxes and penalties on your earnings, you must wait until you are age 59 ½ and have owned the account for at least five years. If you withdraw your earnings before meeting these conditions, you will owe taxes on the money plus a ten percent early withdrawal penalty.
There are a few exceptions to this rule. You can withdraw your earnings early without paying taxes or penalties if:
-You use the money for qualified higher education expenses
-You use the money for a first-time home purchase (up to a $10000 lifetime limit)
-You become disabled
-You are subject to certain medical expenses
-You have significant unreimbursed medical insurance premiums while unemployed
-Your withdrawal is made after your death
Roth IRA Conversion
If you have a traditional IRA, you may be able to convert it to a Roth IRA. This can be beneficial if you expect to be in a higher tax bracket in retirement than you are currently. When you convert a traditional IRA to a Roth IRA, you will have to pay taxes on the money that you convert. However, once the money is in the Roth IRA, it will grow tax-free and you will not have to pay taxes on withdrawals (as long as you meet the conditions discussed above).
If you are considering converting a traditional IRA to a Roth IRA, it’s important to speak with a financial advisor to see if this is right for you.
The Bottom Line
Roth IRAs can be an excellent way to save for retirement. They offer tax-free growth and allow for more flexibility than traditional IRAs. If you are eligible to contribute to a Roth IRA, it may be worth considering as part of your retirement savings strategy.
If you have any questions about Roth IRAs or would like help setting one up, please feel free to contact us. We would be happy to assist you.
Podcast Episode: Traditional IRA vs Roth IRA For Retirement. Which Is Better?