The Comprehensive Guide to Roth IRAs

You can never start saving for retirement too early. In 2017, over 60,000 people invested money into an individual retirement account (IRA), a fund designed to help grow your retirement savings over time. IRAs can be divided into two types:

  • Traditional IRAs
  • Roth IRAs

The majority of people choose a traditional IRA, which lets you deposit pre-tax dollars. Through this plan, you don’t have to pay taxes on the money until you withdraw it. Traditional IRAs work great for people in a lower tax bracket after retirement, but what if you end up in a higher one? If you think this is a possibility, then you should consider a Roth IRA instead. Here’s a quick Roth IRA guide to help you learn more about how it works.

What Is a Roth IRA?

A Roth IRA is a retirement account that’s funded by your after-tax dollars. In other words, you deposit money into the account after you’ve paid taxes. These contributions are not tax-deductible — this means you don’t get any tax breaks for contributing to your retirement fund.

On the bright side, once you reach retirement age, you’re able to withdraw tax-free money. By handling your tax requirements early on, you don’t need to worry about them once you retire.

Benefits of Roth IRAs

Wondering whether a Roth IRA is the right choice for you? Consider these benefits.

Tax-Free Retirement Income

As mentioned earlier, Roth IRAs let you enjoy tax-free retirement income. If you’re in a higher tax bracket after retirement, then not having to pay taxes on your IRA withdrawals is a big relief. To estimate your retirement tax bracket, you’ll need to consider all of your (and your spouse’s) income sources, taxes and expenses. These include:

  • Employment income
  • Social Security
  • Pension
  • Federal, state and local tax rate

If you have an accountant, they can review your finances and help estimate your tax bracket. Alternatively, if you’re making your own calculations, you may want to use an online calculator. While estimates can be a helpful guideline, it’s important to remember that they’re not always accurate (especially if you’re a long way from retirement).

Easy Access to Funds

When it comes to withdrawing your IRA funds, Roth IRAs are less strict than traditional ones. Most traditional IRAs impose a penalty if you withdraw money before the age of 59½. Roth IRAs, on the other hand, let you withdraw money any time, both tax-free and penalty-free. There are a couple of exceptions to this rule:

  • You may have to pay a penalty if you’ve had your Roth IRA for less than five years
  • You can only withdraw your contributions, not your earnings (or money that has grown)

Unlike a traditional IRA, Roth IRAs can be used as emergency funds in addition to retirement funds.

No Expiration for Contributions

Say you’ve reached retirement age, and you don’t need to dip into your savings yet. If you have a traditional IRA, you don’t have a choice — you’re required to start making withdrawals after age 72.

However, if you have a Roth IRA, you can continue to contribute funds if you wish. This allows you to grow your money for your heirs.

Is a Roth Ira Right for Me?

If you’re confident that you will be in a higher tax bracket when you’re older, then a Roth IRA is the most sensible option. However, it’s not available to everyone.

To qualify for a Roth IRA, you must be below a certain income level. As of 2021, you cannot contribute to a Roth IRA if you have a modified adjusted gross income of over $140,000 (or $208,000 if you file with your spouse).

How Do I Open a Roth IRA?

If you’re interested in a Roth IRA and meet the qualification requirements, you can open an account through one of the following:

  • Banks
  • Brokerage companies
  • Federally insured credit unions
  • Savings and loan associations

Every Roth IRA provider has its own terms and conditions — some might require minimum account balances, while others charge extra fees or penalties. Always compare your options before selecting one.

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