A few have been asking the question “What is Roth IRA” online. Roth IRAs are retirement account that provides valuable tax benefits, including tax-free growth on your investment. It is an individual retirement account where money grows tax-free.
One of the major advantages of the platform is that it is a tax-free investment platform. You should read this article to learn about this platform and how it works.
For the sake of a balanced view, it is recommended to think of any drawbacks of a Roth IRA too. You are unable to take loans in the way you can with some other 401(k)s.
Users can always withdraw their Roth IRA contributions at any time without being penalized or paying interest or taxes. Also, early withdrawals before the age of 59½ of your investment earning come with a 10% penalty unless you meet one of a handful of exceptions.
How do Roth IRAs Work?
You can pay taxes on investments upfront, let your money compound, and withdraw in retirement are tax-free. Users can also withdraw their contributions tax and penalty-free when emergencies come up.
Who Can Open a Roth IRA?
Any person can open a Roth IRA, as long as they meet the income limit. They also should have income from work as the IRS term is taxable compensation.
Benefits of Roth IRA
Potential Tax Savings
With this IRA, you can pay taxes on the money you contribute now, instead of when your tax rate may be higher. If your tax rate is lower, then it makes sense to pay taxes in return for tax-free retirement withdrawals.
Users can withdraw the contributed money at any time, without taxes or penalty. You might be penalized if you withdraw investment earnings.
Users can contribute to a Roth in addition to a 401(k).
Users can decide on when and how much they want to contribute to the IRA. For instance, you could contribute $6,000 on the first day of the year, or split up your contribution over the months.
Extra Time to Contribute
You will be given until the tax deadline to contribute for the previous calendar year.
After you have hit 59½ and own an account of at least five years, then you can take a distribution, including earnings from the Roth IRA without paying any federal tax.
No Age Limit to Open
A Roth IRA can be opened at any age, as long as the person has earned income. You can’t contribute more than your income earned.
No Required Minimum Distributions
Roth IRAs are not subject to the required minimum distributions required from a traditional IRA or 401(k) starting at the age of 72.
Roth IRA Income Limit
|Filing Status||2021 MAGI||2022 MAGI||Maximum annual contribution|
|Single, head of household, or married filing separately. If you don’t live with your spouse during the year||Less than $125,000||Less than $129,000||$6,000 ($7,000 if 50 or older)|
|$125,000 up to $140,000||$129,000 up to $144,000||Contribution is reduced|
|$140,000 or more||$144,000 or more||No contribution allowed|
|Married filing jointly or qualifying widow(er)||Less than $198,000||Less than $204,000||$6,000 ($7,000 if 50 or older)|
|$198,000 up to $208,000||$204,000 up to $214,000||Contribution is reduced|
|$208,000 or more||$214,000 or more||No contribution allowed|
|Married filing separately. If you lived with your spouse at any time during the year||Less than $10,000||Less than $10,000||Contribution is reduced|
|$10,000 or more||$10,000 or more||No contribution allowed|
How to Open a Roth IRA
This is a smart way to supercharge your investment savings. Below is how to get started:
- Figure out if you qualify for the platform
- Decide on the type of investor you are (do-it-yourself investor or manage it for me investor)
- Choose a provider and open your account
- Select your investments
And that’s it.
Best Roth IRA Accounts
- E*TRADE IRA
- Fidelity IRA
- Interactive Brokers IBKR Lite
- SoFi Automated Investing
- Wealthfront IRA
And many more.
Roth IRA Withdrawal Rules
Below are the few withdrawals and distribution rules you must follow:
- Users can withdraw an original contribution when they want, without owing any penalties or taxes. The age of the user’s account does not affect the withdrawal. This is because the money put in is the same one from which you already paid income tax.
- When you make withdrawals from the platform, IRS always assumes your original contributions come out first.
- Qualified and accepted withdrawals of investment earning in the platform come out tax-free. In certain circumstances, the IRS may want a piece of the returns in the form of taxes and possible penalties. But this is if you withdraw early or don’t meet the rules for a qualified withdrawal.
- People of at least 59½ years who hold their account for at least five years can take distributions, which includes earnings, without paying federal taxes.
Roth IRA vs Traditional IRA
If you want an immediate tax break, consider the traditional IRA. But the Roth IRA is the best idea for tax-free income in retirement. A Roth IRA is a smart saving tool for young people that are starting, as they are likely to face higher income tax rates.
Someone who wants to further along their career path can also fall to Roth IRA. This is because they provide a tax-free income in retirement. It provides what some financial advisors refer to as “tax diversification”.