With higher Roth IRA income limits this year, learn more about how to enjoy tax-free withdrawals at age 60.
In this article:
- Who Qualifies for a Roth IRA?
- What Is the Difference Between Roth IRA Income Limits and Traditional IRA Income Limits?
- When Should a Person Forgo a Roth IRA?
- Where Can a Person Open a Roth IRA?
- Why Should One Open a Roth IRA?
- How Can One Maximize a Roth IRA?
What One Needs to Know About Roth IRA Income Limits
Roth IRA Definition: This is an individual retirement account that is not tax deductible. It allows a person to save for retirement on a pre-tax basis.
Roth IRA Income Limits Definition: These are income limits that determine who is eligible for a Roth IRA.
Who Qualifies for a Roth IRA?
Eligibility for a Roth IRA varies per individual and tax-filing status. For heads of households and those who are single, the income limit for a full Roth IRA contribution for 2019 must be less than $122,000.
This is in comparison with the income limit of $120,000 in 2018. The phase-out limit for 2019 is $137,000.
For joint accounts and qualified widows or widowers, Roth IRA income limits for this year must be less than $193,000. This is in comparison with the Roth IRA income limit of $189,000 in 2018. The phase-out limit for 2019 is $203,000.
For married couples who are filing for a Roth IRA separately this year, the income limit for a full Roth IRA contribution is $0. The phase-out limit for 2019 is $10,000.
If a married couple has not lived together in the past year, they may file under the limits of single individuals.
What Is the Difference Between Roth IRA Income Limits and Traditional IRA Income Limits?
Because they are not tax deductible, Roth IRA income limits are high. This is why withdrawals in retirement are tax-free.
The Roth IRA contribution limits for 2019 rose to $6,000 (or $7,000 for those aged 50 and up) from $5,500 in 2018. This inflation-adjusted figure is great news for those who want to save more for retirement.
On the other hand, Traditional IRA contributions do not have income limits. This is why retirement distributions are tax deductible just like ordinary income.
Traditional IRA contribution limits for 2019 are $6,000, including $1,000 in catch-up contributions for individuals who are 50 and above. This is regardless of the person’s income.
Other Differences Between a Roth and a Traditional IRA:
There are no Roth IRA age limits. Individuals can contribute at any age and for as long as they want.
With Traditional IRAs, however, individuals must take distributions once they reach the age of 70 ½.
With Roth IRAs, money can be withdrawn without penalty at any time. This is in contrast with Traditional IRAs.
If an individual takes the distribution before retirement, a tax will be deducted. Furthermore, the individual will be subject to an additional penalty if they are under the age of 59 ½.
When Should a Person Forgo a Roth IRA?
While opening a Roth IRA may seem the likely choice over a Traditional IRA, it is not always the case.
Age plays a significant role in deciding whether or not a Roth IRA is the way to go. Investing in a Roth IRA at a younger age is generally ideal because you are likely in a lower tax bracket.
However, this oftentimes is not the same case if you are opening a Roth at age 64. This is because the IRS has a five-year rule that prevents individuals from withdrawing their money within five tax years of opening the account.
Therefore, if you are planning to open a Roth IRA at age 64, you will have to wait until age 69 to get your earnings without penalty.
There are other things to consider before opening a Roth IRA. The first is whether one spends more than he or she earns. This is because the money invested now will not be available until retirement.
Second is if a person is in debt. This makes it even more difficult to pay for the additional tax.
Finally, persons in a high tax bracket now may want to consider skipping the Roth. This is because they may be in a lower tax bracket when they retire.
Where Can a Person Open a Roth IRA?
There are a number of investment companies that one can get in touch with if he or she wants to open a Roth IRA.
Online brokers can help a person choose from an extensive list of low-cost investments. These include exchange-traded funds and index mutual funds.
Individuals can also opt for a self-directed IRA. With self-directed IRAs, investors can make all investment decisions on their own. This allows for a wide variety of investments such as real estate properties, precious metals, and digital currencies, in addition to mutual funds, stocks, etc. Three types of self-directed IRAs that investors can choose from are custodian controlled, financial institution offered, and checkbook. Each allows for different types of investments and comes with different fees.
If time is of the essence, then you may want to opt for a robo-advisor. Robo-advisors help investors manage their portfolio by hiring investment professionals to do the work for them.
Robo-advisors are also in charge of purchasing investments and managing accounts. With this setup, investors save time and money while watching their earnings grow.
For those who want to play it safe, banks also offer Roth IRA accounts. Visit the website of a financial institution, fill out the application online, and supply the requirements.
The bank will then open a person’s account and let him or her design his or her own portfolio.
RELATED: How To Open A Roth IRA
Why Should One Open a Roth IRA?
Aside from the tax benefits it offers, a Roth IRA is flexible. This means that individuals can withdraw their money any time without worrying about taxes and penalties.
Roth account holders are also not obliged to withdraw money at age 70 ½. This is in contrast with Traditional IRA rules.
Finally, if they remain within the income limits, Roth account holders can continue to make contributions past retirement age.
How Can One Maximize a Roth IRA?
Contributing as much money as possible is an excellent way to get the most value out of a Roth IRA.
If a person can go for the maximum amount, then by all means that is encouraged. For 2019, the Roth IRA income limit is $6,000 for the majority and $7,000 for those who are 50 and older.
Make sure to religiously make a contribution. Skipping years can significantly affect one’s future savings.
Choosing your investments wisely is another way to maximize a Roth.
Exchange-traded funds, index funds, and alternative assets can offer portfolio diversification. High-quality dividend growth stocks may also be ideal because Roth IRAs shield them from dividend taxes and capital-gains taxes.
It is never too early to prepare for the future. Opening a Roth IRA is just the first step to a rewarding and fruitful retirement. In the end, you will achieve financial independence.
Have you opened a Roth IRA? How is it going for you so far? Tell us your story in the comments section below.