If you’re new to retirement saving, you might have no idea what a Roth IRA is, or the benefits of it. In the following article, we will talk about the benefits of the Roth IRA and why you should have one. If you’re serious about saving for retirement, a Roth IRA is a must have.
Unlike a traditional IRA, Roth plans are funded with after-tax money. Since you’ve already paid the taxes, there is not immediate tax break as with traditional plans. Traditional plans are tax-deferred, meaning you don’t pay the taxes up front and are only taxed once you withdraw funds from the account. However, the bright side is that your earning grow tax-free! As long as you’ve had the Roth account for at least five years and you are at least 59 1/2 years of age, all distributions are tax- and penalty-free.
Next, although it’s not recommended, you can withdraw any or all of your contributions at any time without penalty. Note that whatever money you do withdraw, it will not be earning for you. If you need more than your principle and have to withdraw earnings as well, that money will be subject to a 10% early withdrawal penalty if you haven’t reached age 59 1/2. Some people use a Roth IRA as an emergency fund, it’s not always a great idea since you want money in any retirement account to stay in there until you actually retire so that it maintains it’s earning power for you.
Further, you can contribute to a Roth as long as you are earning a paycheck or receiving a 1099 for contract work, no matter your age. With a traditional plan, you can no longer contribute once you reach age 70 1/2. Moreover, once you reach that age, you must start taking required minimum distributions or RMDs with other retirement plans including IRAs and 401(k)s. If you have a Roth IRA, there are no RMDs. If you don’t need the money, you don’t have to withdraw and can heir to your beneficiary (minimum distributions do apply to heirs). With talk about doing away with these so-called “Stretch IRAs”, speak with an expert if this is part of your plan.
The biggest plus is the ability to have tax-free income come retirement. It’s a wonderful benefit especially for younger people who haven’t reached his/her earning potential yet and is thus in a lower tax bracket. Plus, if you already contribute to a workplace plan that’s tax-deferred, this will help balance your portfolio even more.
It’s important to note that not all people can open a Roth IRA directly. For 2013, if you earn less than $112,000 as an individual, you can fully contribute to a Roth. The contribution phases out until $127,000 where you cannot open a Roth. You can get around this limit if you rollover money from a traditional IRA or 401(k) into a Roth IRA. The max you can contribute to any IRA for 2013 is $5,500 (+ $1,000 more if you are at least age 50).
If you have any questions about a Roth IRA or are looking to invest in one, contact the IRA experts at the IRA Financial Group, who are the nation’s leading facilitators of self-directed IRAs and Roth IRAs.