Understanding Roth IRAs
In a Roth IRA (Individual Retirement Account), you can contribute only after-tax dollars. This may be a good option for those who expect to be in a high tax bracket in the future.
Advantages of Roth IRA
contributions
There are no age limits to make contributions.
Your contributions will grow tax deferred.
If your income exceeds certain ranges set by the IRS, you will not be able to contribute.
Roth IRA contributions are not tax deductible, so they don’t provide any immediate tax benefits in the current year.
Money grows tax-free
Your money grows tax-free. Taxes are paid only on the money you contributed in the year you earn it. No taxes will ever be paid on the profits made in the account when taking qualified distributions, assuming you meet the requirements for both age and length of time the account was open.
More Flexibility on Distributions
Money can grow tax-deferred with the option of pre-tax dollar investment.
Can receive rollover contributions
You can rollover contributions from other retirement plans once every 12 months in addition to your annual contributions, allowing you to streamline the management of your retirement assets. However, you have to pay taxes on the amount you rollover if that investment was made with pre-tax dollars.
No Income Tax on Inherited Roth IRAs
There are no income taxes due on inherited Roth IRAs. If you transfer your Roth IRA to your heirs, their withdrawals will also be income tax-free.
Benefits of the Distribution and Withdrawal Rules
This is where the real benefit lies. The words "withdrawal" or "distribution" may be used interchangabley to describe when you take money out of an IRA account. A Roth IRA may be a good option for you if you plan to or expect to be in a high tax bracket in the future.
- If you are age 59 and under, you pay no taxes, but 10% federal tax penalty will apply.
- Between ages 59½ to 70, you pay no taxes. No federal tax penalties will apply.
- 5 years after your initial investment, you may withdraw without paying taxes, but 10% federal tax penalty will apply to certain circumstances.
- Currently, there are no required minimum distribution (RMD) rules. You may keep funds in the account as long as you live. Or, if you’ve had the account for at least five years, you can leave your Roth to a beneficiary tax-free. This may makes the Roth IRA a good estate planning tool and wealth-transfer strategy. Check with you tax advisor about your individual circumstances.
Converting a Traditional
IRA into a Roth IRA
- You can contribute pre-tax or after-tax dollars into a Traditional IRA and take advantage of tax deferral (which means pay taxes later). However, if you choose that option, you will have to pay taxes when you withdraw the pre-tax portion of the money, after the age of 59 ½. It is because, that withdrawal is considered an income.
- There is no age limit to make the conversion.
- And the good news is that as of January 1, 2010, the IRS removed income restrictions on Roth IRA conversion. So, even if you are not eligible to make additional contributions to the Roth IRA due to income limits, you can still enjoy the benefits of Roth IRA on the converted investments.
Making the right decision for you depends on your specific financial situation and retirement goals. Each type of IRA account offers certain features suited to different needs of individuals. We are here to help if you need a better understanding of Roth IRA or any other types of IRA accounts to make a more informed decision.
Give us a call at 877-417-6161 to make an appointment.
