September 19, 2018

Roth IRA Basics

A Roth IRA is an Individual Retirement Account (IRA) funded with after-tax dollars. The already taxed dollars are invested in the Roth IRA, and if specific rules are followed the funds that were contributed plus the growth can be withdrawn after age 59.5 tax-free.

The rules:  To invest in a Roth IRA, the individual must have earned income or a spouse who has earned income to fund your account.  The monies going into the account are after-tax dollars (not deductible).  Each individual can contribute up to $5,500 if they are under 50 years of age and $6,500 if the individual is 50+ (catch-up contribution.)   There are income limits on Roth IRA contributions. If you are single tax filer you can contribute to a Roth IRA if your income is below $120,000 while those who are married filing jointly have an income limit of $190,000. Contributions to a Roth IRA must be made by April 15 for the previous year. To contribute to a Roth IRA for the year 2018, you have until April 15th of 2019 to make the contribution.

The benefits of a Roth IRA include more than just tax-free withdrawals in retirement. The Roth IRA provides the flexibility that other retirement accounts do not provide. In a Roth IRA, there are no required minimum distributions (RMDs). An RMD is when you are forced to withdraw your retirement funds from other accounts, whether you want to or not at age 70.5. You can also withdraw your contributions (cost basis) after the account has been funded for five years, without penalty. There are also other exceptions to withdrawing the funds early: purchase of a first home, college expenses, medical bills etc. Always consult a tax or investment professional before withdrawing the funds from a Roth IRA.  Unlike a Traditional IRA, you can invest in a Roth IRA at any age where you have earned income.

Early withdrawal of money from a Roth IRA, if not for a qualified reason, could be hit with a 10% federal penalty. Always consult with a tax or investment professional before contributing or withdrawing from a Roth IRA.  Have questions?  Email me!

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