What Is a Roth IRA?
A Roth IRA is a type of tax-advantaged individual retirement account to which you can contribute after-tax dollars. The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½ assuming the account has been open for at least five years. Roth IRAs are similar to traditional IRAs, with the biggest distinction being how the two are taxed. Roth IRAs are funded with after-tax dollars—this means that the contributions are not tax-deductible, but once you start withdrawing funds, the money is tax-free.
Understanding Roth IRAs
Similar to other qualified retirement plan accounts, the money invested within the Roth IRA grows tax-free. However, a Roth IRA is less restrictive than other accounts. The account holder can maintain the Roth IRA indefinitely; there are no required minimum distributions (RMDs) during their lifetime, as there are with 401(k)s and traditional IRAs
Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.
A Roth IRA can be funded from a number of sources:
Who’s Eligible for a Roth IRA?
Anyone who has earned income can contribute to a Roth IRA—as long as they meet certain requirements concerning filing status and modified adjusted gross income (MAGI). Those whose annual income is above a certain amount, which the IRS adjusts periodically, become ineligible to contribute.
A Roth IRA is a type of tax-advantaged individual retirement account to which you can contribute after-tax dollars. The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½ assuming the account has been open for at least five years. Roth IRAs are similar to traditional IRAs, with the biggest distinction being how the two are taxed. Roth IRAs are funded with after-tax dollars—this means that the contributions are not tax-deductible, but once you start withdrawing funds, the money is tax-free.
Understanding Roth IRAs
Similar to other qualified retirement plan accounts, the money invested within the Roth IRA grows tax-free. However, a Roth IRA is less restrictive than other accounts. The account holder can maintain the Roth IRA indefinitely; there are no required minimum distributions (RMDs) during their lifetime, as there are with 401(k)s and traditional IRAs
Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.
A Roth IRA can be funded from a number of sources:
- - Regular contributions
- - Spousal IRA contributions
- - Transfers
- - Rollover contributions
- - Conversions
Who’s Eligible for a Roth IRA?
Anyone who has earned income can contribute to a Roth IRA—as long as they meet certain requirements concerning filing status and modified adjusted gross income (MAGI). Those whose annual income is above a certain amount, which the IRS adjusts periodically, become ineligible to contribute.
Will taxes go up or down in the future?
THE ROTH 5-YEAR RULE
ROTH CONTRIBUTIONS (THE FIVE YEAR RULE)
- To satisfy this rule, you must have owned a ROTH IRA for 5 consecutive tax years.
- Once you satisfy the rule for ONE ROTH IRA, you have satisfied it for all of your current and future ROTH IRA's forever.
- The rule does NOT determine whether you will pay a 10% penalty
- If you have not met this rule, any earnings distributed will be treated as taxable income
- Even if you are 59 1/2 or older
- Even if you are a first-time homebuyer
- Even for beneficiaries
- The 5 year holding period of the ROTH 401(k) doesn't carry over to the Roth IRA, so unless an employee already has a Roth IRA, the 5-year holding period starts over for any measure of tax-free gain on the IRA side.
- If the roth 401k has met the 5 year holding period and a qualifying event occurs (usually age 59 1/2) then the Roth elective deferrals plus the gain on those deferrals come over to the Roth IRA as 100% as a tax-free basis. But any future growth on that basis has to meet a brand new 5 year holding period. It doesn’t get the benefit of the 5 years that the Roth 401k already satisfied. So a Roth IRA should be set up simultaneously while in the ROTH 401(k) so that both 5 year periods are running concurrently.
- Roth 401(k)s have higher contribution limits than a ROTH IRA.
- The rule determines weather you will pay a 10% penalty on any distributions
- The 5-year rule must be satisfied for EACH AND EVERY Conversion
- Rule does not apply once you reach 59 1/2 years old
- ROTH IRA conversion ladder strategy (For early retirement)
ROTH IRA HAS Required Minimum Distributions (RMDs)
Roth 401(k) accounts are subject to the same required minimum distribution (RMD) rules that apply to traditional 401(k) accounts. Therefore, the account owner must start taking RMDs from their Roth 401(k) for the year in which they reach age 70½ and continue for every year thereafter. Learn how to avoid RMD's on a ROTH 401(k) Read More
Roth 401(k) accounts are subject to the same required minimum distribution (RMD) rules that apply to traditional 401(k) accounts. Therefore, the account owner must start taking RMDs from their Roth 401(k) for the year in which they reach age 70½ and continue for every year thereafter. Learn how to avoid RMD's on a ROTH 401(k) Read More
