Roth IRA
When it comes to saving and investing for retirement, there are countless account types and investment vehicles to choose from. No one type is the perfect fit for everyone and there are likely more than one that are appropriate for each investor. Today, I want to outline an account type that you’ve likely heard about but maybe never understood the specifics. That is the Roth IRA. IRA stands for individual retirement account and while there are Traditional IRAs that are very common, the Roth IRA has a few different features.
- A Roth IRA is a retirement account designed to hold securities inside and signal to the IRS that the money inside the account receives special tax treatment. The Roth itself is not an investment vehicle, only a garage for said investments.
- A Roth IRA is contributed to with after tax dollars, meaning all the money you put into a Roth you have already paid taxes on (think of money sitting in your bank account that came from your employer who already withheld taxes). This is different than a Traditional IRA in that the contributions to a Roth are not pre-tax or tax deductible.
- All qualified money removed from the Roth after age 59 ½ is tax free (must also meet IRA five year holding period). All the earnings inside the Roth can be withdrawn tax free as long as you have achieved the eligibility age of 59 ½. Prior to age 59 ½ all contributions to the account come back as a return of principle but earnings are taxed as ordinary income and potentially penalized 10%. There are certain penalty exceptions and your tax professional can determine if you are eligible.
- Eligibility for Roth IRAs is based on MAGI (Modified Adjusted Gross Income) and must be less than $140,000 for single earners and $208,000 for those married and filing joint (2021).
- The contribution limit for 2021 is $6,000 with a $1,000 catch-up for those 50 years or older.
- Some employer plans offer Roth options within their plan.
- Roth IRA conversions allow account owners to convert portions of their Traditional IRA to a Roth IRA and pay taxes in the year of the conversion in order to save on taxes in the future. This is particularly beneficial for those who are in a lower tax bracket today but expect to be in a higher bracket in the future.
- If only one spouse has earned income, the non-working spouse can still own a Roth IRA and contribute based on the working spouse’s income.
- Currently, there are no required minimum distributions (RMDs) for Roth IRAs. Traditional IRAs have certain distribution requirements once an owner achieves age 72, but as the law is currently written, Roth IRA owners are never required to withdraw funds from their account. It can be passed on from generation to generation if they choose.
A Roth IRA certainly isn’t right for everyone, but it is one of many tools we like to use in our toolbelt when possible. Tax-free money in retirement is beneficial, especially for those in higher tax brackets in retirement. It is always important to visit with your tax professional prior to opening or contributing to a Roth IRA. They will know if you are eligible and what advantages a Roth will have for you personally. It’s possible they may suggest a different type of account instead.
Any opinions are those of Molly VanBinsbergen and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the forgoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making investment decisions and does not constitute a recommendation. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
