The Ultimate Roth IRA Guide: Everything You Need to Know

Saving for retirement is important, but it can also be overwhelming. With so many different types of retirement savings accounts, each with their own benefits and opportunities, it can be difficult to know which one is right for you. A Roth IRA has many unique benefits and can be a great potential retirement savings vehicle depending on your needs and current income. 

Learn more about Roth IRAs below, and set up a consultation with a Good Life financial advisor to discuss the retirement plan that’s right you.

What Is A Roth IRA? 

A Roth Individual Retirement Account (IRA) is a retirement savings account opened and maintained by an individual. This differs from an employee sponsored 401(k), which is maintained by an employer or government sponsored retirement program such as social security. One of the most appealing aspects of a Roth IRA is the unique tax advantages it offers. 

Tax Advantages 

A Roth IRA is taxed similarly to a Roth 401(k). Contributions to a Roth IRA are made with after tax money, but the account grows tax free, and qualified withdrawals are tax free. If you expect to be in a higher tax bracket after retirement, then a Roth IRA provides potential tax savings. This is because you pay taxes on the money while in a lower tax bracket as opposed to later in life when you may be in a higher tax bracket. Designated beneficiaries of the account may also receive withdrawal funds tax free. 

Contributions & Distributions 

As of 2019, both Roth and traditional IRA annual contribution limits are $6,000 (unless you’re over 50 years old, in which case the annual limit is $7,000). Unlike a traditional IRA, you can continue to contribute to a Roth IRA as long as you have income, but you cannot contribute more than your earned income. One thing to note is that Roth IRA contributions are not tax deductible, while traditional IRA contributions are. 

With a traditional IRA, there are required minimum distributions beginning at 70 ½. This is not the case for Roth IRAs, which have no distribution requirement. 

Income Limits 

One of the largest disadvantages of a Roth IRA is that you’re unable to contribute to the account if your income is over a certain amount. The limits for all status of tax filers were updated in 2019 and is based on your Adjusted Gross Income (AGI).

Single Filers

  • Maximum Amount. Currently, if you are a single tax filer with AGI under $122,000, you may contribute the maximum amount.
  • Reduced Amount. If your AGI is between $122,000 and $136,999, you may contribute a reduced amount.
  • Ineligible. Finally, if your AGI is over $137,000 you are not eligible.

Married & Joint Filers

  • Maximum Amount. If you’re married and filing jointly, you may contribute the maximum amount if your AGI is less than $193,000.
  • Reduced Amount. You may also contribute at a reduced limit if your AGI is between $193,000 and $203,000.
  • Ineligible. If your AGI is over $203,000, you are not eligible to contribute. 

Roth Conversions 

One way to get around the contribution limits is to convert a current traditional IRA to a Roth IRA. You may also rollover an employee sponsored 401(k) into a Roth IRA if you are retiring or leaving that employer. You can convert your current retirement savings account to a Roth account regardless of your current income, but any contributions made after the conversion apply to the income limits. 

If you move funds from a retirement savings vehicle that you have not already paid taxes on—such as a 401(k) or traditional IRA—you will have to pay taxes on that income, but you will not have to pay any taxes on withdrawals made in retirement. 

Withdrawals 

After turning 59 ½ years old, you may withdraw as much as you would like from a Roth IRA, if you’ve had the account for more than five years. You may withdraw contributions prior to 59 ½ with no penalties, but you may not withdraw earnings without incurring a 10% penalty. Contributions are the money you put in, while earnings are the income earned from your contributions. 

There are some exceptions to the 10% penalty. If you are not 59 ½ and have had the account for five years, you can withdraw money penalty-free and income tax free in certain situations such as a qualified first-time home purchase, death, or disability. 

Is A Roth IRA Right For You? 

Roth IRAs tend to be a better option for younger people. Since you pay taxes on the money now as opposed to in retirement, those who are earlier in their careers may benefit most from this specific tax advantage. The ability to withdraw money early and penalty free for a qualified first-time home purchase is another reason this may be an appealing account option for young people. 

Discuss Your Options With Good Life Financial Advisors

The most important thing about saving for retirement is simply that you’re doing it. But taking advantage of the right account for your circumstances can provide huge benefits later on.

Talk with one of our professional financial advisors for assistance in creating a financial plan for your unique situation.

DISCLAIMER

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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