When looking into the best options for your retirement and investments, you may have heard of the Roth IRA. Many people rely on their employers for a 401(k) savings plan, but it’s important to have a secondary savings option. Here is an overview of what it is involved with the Roth IRA and what you can expect when looking to make a decision about whether or not it is right for you.
What is a Roth IRA?
The Roth IRA is an individual retirement account that offers you the ability to contribute to it as well as benefitting from tax-free income after you retire, if you follow the rules properly. In order to qualify, your income must be within a specific range. If it is too high, you may have to go the route of the Traditional IRA, with the option to convert later on to the Roth IRA.
Should I Consider A Roth IRA?
Advantages and Disadvantages of the Roth IRA
Advantage: You can withdraw your contributions at any time without having to worry about incurring penalties. You can also withdraw your earnings from your account after a period of 5 years if a certain condition (such as age, 59 ½ and up) is met without having to pay taxes on those earnings.
Disadvantage: Due to current rules, you cannot use funds from your Roth IRA account as collateral for a loan. This can limit your investment options.
Roth IRA Rules
Your contributions must come from earned income, as opposed to another situation, such as money acquired from student loans. There are no restrictions in regards to age for contributions; the only requirement is that you must be making an income. Since you will be contributing to your Roth IRA with your post-tax earnings, there are no tax deductions available. The benefits you reap will with this option mainly come from a withdrawal standpoint.
Who can contribute & what are the Roth IRA contribution limits
If you’re under the age of 50, your contribution cannot exceed $5,500 dollars. If you are over the age of 50, your limit is increased to $6,500 dollars.
For single individuals, the 2018 MAGI (Modified Adjusted Gross Income) phase-out ranges for Roth IRAs is $120,000 – 135,000. For married individuals filing a joint return, the phase-out range is $189,000 – $199,000. For married individuals filing separate tax returns, the phase-out range is $0 – 10,000.
Roth IRA Withdrawal Rules
With the Roth IRA, you can withdraw your contributions at any time and they will be tax-free as well as penalty free. This is the biggest benefit of going with this option, while creating, ultimately, flexibility for you. If you have converted your Roth IRA from what was originally a Traditional IRA, know that you will pay income taxes based on the amount that was converted. Of course, while your money will not appreciate if it’s withdrawn prematurely, this is still a great option to have for whatever emergency situations may arise.
Also, unlike the Traditional IRA, there are no mandatory withdrawal rules, allowing you to freely invest in something like real estate without having to worry about the penalty of not removing funds when you’re supposed to. With the Traditional IRA, you must withdraw a specific amount of your money by the time you reach age 70. With the Roth IRA, you aren’t tied down by those restrictions. You may find the Roth IRA to be an ideal option for you if you fall below a certain income and you enjoy flexibility.