What is a Roth IRA? Anyone who is building a retirement account needs to know the answer. Understanding a Roth IRA and how it differs from Traditional IRA and other forms of an individual retirement account can help you plan your savings goals.
What Is Roth IRA | Learn the Basics
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What Is a Roth IRA?
So what is a Roth IRA? As a retirement plan, it has a few characteristics that make it different from Traditional IRAs.
You fund your Roth IRA account with post-tax income. It means you cannot reduce your taxes with the Roth contributions. Since it uses post-tax income, there is no tax on withdrawals. It also allows your retirement money to grow tax-free.
To grow your money, usually, a broker or an agent handles your Roth IRA. If you want to do it yourself, you can have a self-directed IRA. You decide where you invest your money. Some of the options include mutual funds, bonds, and stocks. You can also invest in other assets like gold and cryptocurrencies.
Who Should Use a Roth IRA?
Roth IRAs have a unique setup. It makes the account a good fit for many types of people:
- Roth IRAs have income limits, but those who have a lower income can benefit from it. They can give up to the maximum Roth IRA contributions.
- Younger workers will also find these types of accounts beneficial. Anyone who has a job qualifies to open a Roth IRA. Even children below 16 can make a contribution as long as it’s earned income. Younger workers will have the benefit of decades of earning compound interest on the money they invest.
- Older people can also invest in Roth IRA. Unlike the Traditional IRA, it does not have an age limit. Those who are 70.5 years old can even make a catch-up contribution.
- Many people also like Roth IRAs because of the tax benefits. Those who want to minimize their tax burden during retirement can use this account to build their savings.
- Savvy investors who want to pass inheritance can use the accounts as well. Roth IRAs do not have minimum distributions.
Guidelines for Eligibility for a Roth IRA
A few rules govern who can use a Roth IRA. A single person with an adjusted gross income under $120,000 can make IRA contributions up to the maximum. It is $5,500 annually. A married couple filing jointly must make less than $189,000 to contribute to this maximum. Senior individuals have higher contribution limits. It is $6,500 with $1,000 as the catch-up contribution.
People interested in a Roth IRA should note the maximum income can change each year. The numbers posted here are for 2018.
If you make a bit more than this maximum income, you can contribute less to your Roth IRA. As a single person, you must make less than $135,000 to make these smaller contributions. For a married couple, the income must be less than $199,000.
People who make more than these may not be eligible for a direct Roth IRA. Some people do successfully set up a backdoor Roth IRA or IRA conversion. This strategy lets you make non-deductible IRA contributions each year. You can then convert them to a Roth IRA and continue to fund the Roth IRA account.
Benefits of Roth IRA
There are several benefits to using a Roth IRA. Here are a few prospective investors should consider:
- You can withdraw the money any time. The guidelines only require you have the account for 5 years. You should also be at least 59.5 years old.
- There are also exceptions to the withdrawal guidelines. In the case of death or disability, you can withdraw sooner. People can also elect to withdraw up to $10,000 to purchase a first home. You can a pay a penalty and withdraw money to cover education expenses.
- There are no mandatory withdrawals. Unlike other types of IRAs, you do not have to withdraw money at particular periods. You can then grow the money for as long as you want. You can also use the account to pass along money for an inheritance. The account does not have required minimum distributions.
- Picking just one retirement account is not necessary. You can contribute to both a Roth IRA and a SIMPLE IRA. You can use both, provided you fall within the income range. It allows you to diversify your retirement accounts.
- Sometimes an employer-sponsored retirement plan can include a Roth option. With this option, they can contribute to their account through their business retirement account savings plan.
What is a Roth IRA? It is one of the effective retirement savings strategies. The fact that it’s tax-free helps you build an income with less worry. It can also be flexible to suit your financial needs in the future. Regardless, always study your options. See how a Roth IRA aligns with your personal retirement goals.
What are the things you like about Roth IRA? Share your list in the comments section below.