This week we’ll examine the Roth IRA. While the traditional IRA is the old timer of IRAs, the Roth IRA is relatively new having been established by the Taxpayer Relief Act of 1997. It gets its name from Senator William Roth, the chief proponent of the Roth IRA. With a Roth IRA, you make post-tax contributions using money that’s already been taxed, therefore, no current tax deduction. There is no RMD requirement at age 72, or during the account owner’s lifetime, and you can continue saving in your Roth IRA if you have earned income. Three are, however, income limits on who can contribute.
If your tax filing status is single, you can contribute up to $6,000 ($7,000 if over age 50) if you earn less than $124,000 MAGI. You can make a partial contribution between $124,000 and $139,000 MAGI. If you earn over $139,000, you are ineligible. You may, however, be able to make a Backdoor Roth IRA contribution.
For married filing joint, you can contribute up to $6,000 ($7,000 if over age 50) if you earn less than $196,000 MAGI. You can make a partial contribution between $196,000 and $206,000 MAGI. If you earn over $206,000, you are ineligible. You may, however, be able to make a Backdoor Roth IRA contribution. Notably, you can contribute even if you or your spouse are covered by an employer retirement plan.
Your Roth IRA contributions grow tax free and if your distribution is a qualified distribution, it is tax free! A Roth IRA could be a great savings vehicle for younger investors with a longer time horizon. If you happen to take a distribution prior to age 59 1/2 and have owned your Roth IRA less than five years you’ll owe taxes and a 10% penalty on your earnings portion of the distribution. Like the traditional IRA, this penalty can be avoided if the distribution is for qualified education expenses, first-time home purchase (up to $10,000), or unreimbursed medical expenses in excess of 7.5% of your AGI if you are under age 65. There are a few other exceptions as well so be sure to check with your tax preparer.
If you happen to take a withdrawal prior to age 59 1/2 and have owned your Roth IRA for at least five years or more, you can avoid the income taxes and 10% penalty on your earnings portion of the distribution if you meet one of the following exceptions: first-time home purchase (up to $10,000), disability, or the distribution is paid to a beneficiary of your estate after your death.
If you are over 59 1/2 and have owned your Roth IRA for less than five years, you’ll owe income tax but no 10% penalty on your earnings.
If you are over 59 1/2 and have owned your Roth IRA for five years or more, there is no income tax or 10% penalty on your earnings.
As you can see, the Roth IRA rules can be confusing, and you need to consider your income as well as your goals, investment accounts, and your timeline. Before investing in any type of account, or engaging in an investment strategy, be sure to consult your adviser. Keep in mind that all investing involves risk, and you should always seek help if you are not sure about what you are doing. As an independent Certified Financial Planner™, I can help you. No matter where you are in life, a CFP® professional can help you create a financial plan for today and tomorrow. #LetsMakeAPlan #CFPPro #talktometuesday #Hireaplanner #RothIRA #fees #IRA #SEPIRA #SIMPLEIRA