A Comprehensive Guide to Roth IRA
Updated: Apr 3, 2020
The following is an article “A Comprehensive Guide to Roth IRA.”
by Marc Primo.
You might have probably heard about Roth IRAs before, but what exactly are they and how do they work?
With this guide, we hope to inform and even entice you to open a fund for yourself, to help ensure personal financial security.
What is the Roth IRA?
A Roth IRA is a specific kind of Individual Retirement Arrangement (IRA) which you can fund with your post-tax income.
Unlike Traditional IRAs, there is not an immediate tax deduction in Roth IRA contributions - and their distributions are completely tax-free, as long as you follow some guidelines.
Additionally, since the whole value of your Roth IRA came funded from your own money, you can tap those contributions at any time - no taxes, no penalties, no questions asked. Simply put, a Roth IRA is a great alternative when it comes to saving for your retirement due to its tax-efficient nature.
Of course, the actual benefits of such an agreement will depend on your current and foreseeable tax bracket by the time you retire.
Who is the Roth IRA ideal for and Why?
Funding a Roth IRA sure sounds like a great retirement option, but only some demographics will make the most out of it. For example, those who expect their tax rates to be significantly higher by the time they retire than what they currently are - i.e., young, low-income workers.
Another target pool which can enjoy the benefits from funding a Roth IRA are those older and wealthier tax-payers who wish to pass their assets onto their descendants in a tax-free fashion. Last, but not least, when we talk about Roth IRAs, there are no RMDs (Required Minimum Distributions), not the case with Traditional IRAs. This setup allows for an efficient tax-free growth along with qualified withdrawals.
Just in case you need a little more convincing about this significant personal finance decision, we do have some more reasons.
As we have stated before, withdrawals can be made at any point with no penalties or taxes. Although you must have had your Roth IRA account for at least five years, and be 59-and-a-half-years of age or older to tap your earnings with no taxes or penalties, there are some exceptions - e.g., death or disability of the account holder. Also, for a first-home purchase for yourself or an eligible family member, there is a US$ 10K tapping limit. Secondly, there are no mandatory withdrawals, which makes it ideal for wealthier retirees. Lastly, you can continue saving during your retirement - unlike with Traditional IRAs, where you are not able to make contributions if you are 70-and-a-half-years of age or older.
Eligibility and Contribution Limits.
When it comes to the eligibility pool, Roth IRAs are quite flexible - although if your income is too high, you won't be eligible. The maximum amount you can contribute per year is US$ 5,5K or US$ 6,5K if you are 50-years of age or older. To keep discussing contribution limits, we must first understand the MAGI (Modified Adjusted Gross Income), which is used to determine IRA eligibility and is calculated by the IRS, factoring variables like gross income, taxes, rental losses, student-loans interests, and others.
Roth IRAs are one of the safest and most-efficient personal finance decisions when talking about retirement. Hopefully this article will push you to at least think about it.