A Roth Individual Retirement Account (Roth IRA) is a personal account that allows you to save for your retirement on top of employer sponsored plans like 401(k), 403(b), and 457 plans and then make tax-free withdrawals.
Key aspects of Roth IRAs:
- Roth contributions are post-tax contributions taxed when you earn the income, not when the retirement distribution is made. So, say you earn $2000 per paycheck and contribute $200 as a Roth contribution. You will still pay taxes on the $2000. Whereas if you had made a traditional IRA contribution of $200, you’d pay taxes on an adjusted paycheck of $1800.[1]
- Once you contribute money to a Roth IRA, your investments can grow tax-free within the account. This means you won’t owe taxes on the capital gains, dividends, or interest earned as long as the funds remain in the Roth IRA. You were taxed before the funds entered the account. 1
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[2]
- Investment options include individual stocks, mutual funds, ETFs, annuities, UITs, etc. Investment vehicles not allowed in IRAs are Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins.[4]
- Only earned income can be contributed to a Roth IRA. You cannot contribute from alimony (nontaxable), child support, Social Security retirement benefits, or unemployment benefits.[5]
- Investment control is either by your chosen institution or advisor or can be self-directed. With this account, you must know your risk tolerance and diversification strategy. These are especially important if you are self-directed and need to make changes to your investments as you make changes to your life and risk tolerance.3
Roth IRA Contribution Income Limits for 2024[6]
Filing Status | Modified Adjusted Gross Income (MAGI) Limits |
Single or Head of Household | Full Contribution: Up to $ 146,000 MAGI
Partial Contribution: $ 146,000 to $161,000 MAGI No Contribution: Over $161,000 MAGI |
Married Filing Jointly | Full Contribution: Up to $230,000 MAGI
Partial Contribution: $230,000 to $240,000 MAGI No Contribution: Over $240,000 MAGI |
Married Filing Separately | Partial Contribution: $0 to $10,000 MAGI
No Contribution: Over $10,000 MAGI |
- Fees vary from institution to institution. It is important to understand how much you are paying in fees.
- The earliest you can take penalty-free withdrawals is 59 ½. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you have medical expenses that exceed 10% of your modified adjusted gross income, the cost for your medical insurance while you’re unemployed, your qualified higher education expenses, the amount to buy, build or rebuild a first home (up to $10,000), your withdrawal is in the form of an annuity, your withdrawal is a qualified reservist distribution, you’re the beneficiary of a deceased Roth IRA owner or the withdrawal is the result of an IRS levy.[7]
- Rollovers into Roth IRA can come from other post-tax accounts such as Roth 401(k) accounts, Roth 403(b) accounts, and Roth 457(b) accounts.[8]
- If you have both a Traditional IRA and a Roth IRA, your total contribution limits for both accounts are $7,000 per year for those under 50 and $8,000 for those 50 and older.[9]
If you would like to explore additional retirement investment accounts that could work for your goals, Scarlet Oak Financial Services can be reached at 800.871.1219, or you can contact us here. To sign up for our weekly newsletter with the latest economic news, click here.
Sources:
[1] https://www.investopedia.com/terms/r/rothira.asp
[2] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf
[3] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
[4] https://www.investopedia.com/articles/personal-finance/103114/roth-iras-investing-and-trading-dos-and-donts.asp
[5] https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp
[6] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
[7] https://www.schwab.com/ira/roth-ira/withdrawal-rules
[8] https://www.irs.gov/pub/irs-tege/rollover_chart.pdf
[9] https://www.investopedia.com/ask/answers/03/081503.asp
This material has been prepared for informational purposes. *To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.