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 meaning that they are taxed when you earn the income, not when the retirement distribution is made. So say you earn $2,000 per paycheck, and you contribute $200 as a Roth contribution. You will still pay taxes on the $2,000. Whereas if you had made a traditional 401(k) contribution of $200, you’d pay taxes on an adjusted paycheck of $1,800.
- 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.
- In 2021, the yearly contribution limits are $6,000 per year for those under age 50. People 50 and older can make an additional $1,000 catch-up contribution.
- 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.
- Investment options are almost anything- individual stocks, mutual funds, ETFs, annuities, UITs, etc. In addition, there are investment vehicles that are not allowed in IRAs, including Life Insurance, types of Derivatives Positions, antiques/collectibles, personal real estate, and most coins.
- Investment control is either by your chosen institution or advisor or can be self-directed. With this type of account, you must be aware of your risk tolerance and diversification strategy. These are especially important if you are self-directed, and you need to make changes to your investments as you make changes to your life and risk tolerance.
- Fees vary institution to institution. It is important to understand how much you are paying in fees.
- The earliest you can make 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.
- Required Minimum Distributions (RMDs) are not mandatory at any age.
- 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.
- If you have both a Traditional IRA and a Roth IRA, your contribution limits between the two are $6,000 per year for those under age 50 and $7000 for people 50 and older.
- There are modifying contribution limits for a Roth IRA based on income. Single filer with a Modified Adjusted Gross Income (MAGI) between $125,000-$140,000 have smaller contribution limits than $6000 for under 50 and $7000 for 50 and older, and with a MAGI above $140,000 you cannot contribute to a Roth IRA. For Joint Filers, (MAGI) between $198,000-$208,000 have smaller contribution limits than $6000 for under 50 and $7000 for 50 and older, and with a MAGI above $208,000 you cannot contribute to a Roth IRA.
Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.