There are so many reasons why a Roth IRA is the best retirement plan for so many people. For those that don’t know, a Roth IRA is a type of retirement plan that is funded with after-tax money and all qualified withdrawals are tax-free! Here are some of the many advantages of a Roth IRA:
Obviously, IRAs are a way to save for retirement. However, a Roth IRA is also a great alternative to a savings account. Since contributions are already taxed, they can be withdrawn at any time for any reason and not be subject to taxes or penalties. Since investment gains in an IRA far outweigh the interest earned in a standard savings account, this is a great way to save for emergencies or large purchases.
As mentioned, qualified withdrawals are tax-free, so what is a qualified withdrawal? Two conditions must be met. The account must be open for at least five years and you must be at least age 59 1/2. Traditional IRA and 401(k) plan withdrawals are taxed at ordinary income tax rates. Tax-free growth within your retirement plan is a very attractive option for everyone.
Now the question is who is allowed to contribute to a Roth IRA and how much can you contribute each year? If you (or your spouse) have earned income for the year, you may contribute up to $5,500 plus an additional $1,000 if you are at least 50 years old, subject to income limitations. Note that if your earned income is less than the maximum allowable contribution, you may only contribute up to that amount. As for income limits, high earners are ineligible to directly contribute to a Roth IRA. If you are a single filer and earned more than $112,000 last year (or $114,000 this year) or a couple who earned $178,000 least year (or $181,000 this year) you maximum contribution is reduced and completely phased out if you earned $129,000 as a single or $191,000 as a couple.
While you cannot fund a Roth IRA if you earn too much money, there is still a way to see tax-free distributions during retirement. If you do not have any traditional IRAs, you may fund a non-deductible IRA then immediately convert it to a Roth IRA. If you already have IRAs, you must include them “to calculate a proportionate amount from all of them”, which will cause headaches with your taxes.
Moreover, even if you’re not eligible to contribute to an IRA, you are allowed to convert and funds you have in a traditional plan to a Roth. You will have to pay taxes on any amount converted during the next year’s tax filing date. Pay close attention to tax brackets because you don’t want to convert an amount that will bump you up to the next highest bracket. You also have until October 15 to undo a Roth conversion, known as a recharacterization. If the value of your investments decrease, undo the conversion as if it never happened.
Some final notes about a Roth IRA: unlike traditional plans, you are allowed to fund them as long as you have earned income no matter your age (you may not fund a traditional IRA after you reach age 70 1/2) and there are no required minimum distributions. Also, don’t forget to name beneficiaries for your Roth IRA, since those who inherit it will keep the tax-free status of the plan.
Finally, if you are looking for a plan that allows you to invest in alternate investments such as real estate and precious metals, take a look at the IRA Financial Group’s Self-Directed Roth IRA which allows you to invest in more than the typical stocks, bonds and mutual funds of most financial institutions.