Learning About a Roth IRA Is An Important Step to Retiring

The taxpayer Relief Act of 1997 created the Roth individual retirement account (IRA). It is designed to be an alternative to making non-deductible contributions to a traditional IRA. The Roth IRA makes it possible to make after-tax contributions. These contributions have an opportunity to become income during a person's retirement. There are limits to the amount of contributions a person can make to their Roth IRA. Contributions can be made as long as a person or their spouse has taxable compensation. The amount of contribution made to a Roth IRA will depend on an individual's modified adjusted gross income (MAGI). A person with a Roth IRA is commonly not penalized or taxed when they withdraw their IRA contributions and earnings. Should a person's Roth IRA account not be a minimum of five years old, the earning portions of their withdrawal could be taxable and a 10 percent penalty may have to be paid.

What is a Roth IRA?

A Roth IRA is an individual retirement account. It is designed to provide the opportunity for an individual to have tax-free income during their retirement. Yearly contributions to a Roth IRA are taxed up front. This means the earnings a person receives from their Roth IRA are free of federal tax. It is important for the distributions from a Roth IRA to be done according to IRS rules. There are no minimum distributions. Should someone currently be in a lower tax bracket than they will be during their retirement, a Roth IRA may be a good choice for their situation. There is a limit on the amount of money a person can put into a Roth IRA. As of 2021, the limit on contributions is $6,000 annually. This is different if a person is 50 or older. In this case, they are permitted to deposit up to $7,000 each year. It is also possible for someone to make too much money to be able to contribute to a Roth IRA. In 2021, the limit for unmarried individuals is $140,000. The limit for married couples is $208,000.

How is a Roth IRA different from a traditional IRA?

There are some significant differences between a Roth IRA and other IRAs. Traditional IRAs must meet required minimum distributions (RMDs). A Roth IRA does not have an RMD. There are sections of tax law that require a person with a traditional IRA to withdraw a specific amount of funds from their traditional IRA each year. With a traditional IRA, the RMDs will begin when a person reaches the age of 70½. This is not the case with a Roth IRA.

The money in a Roth IRA is like other qualified retirement plans, it grows tax-free. A big difference is how a Roth IRA is less restrictive than traditional IRAs. An individual with a Roth IRA can continue to make contributions to it at any age. The only requirement is the account holder must have earned income. An account holder can maintain their Roth IRA indefinitely.

Features and Benefits

A Roth IRA is created and funded by individual taxpayers. They must use after-tax dollars to fund it. The money in a Roth IRA will grow and be tax-exempt.

• Qualified distributions are tax and penalty-free. A qualified distribution is one that is taken a minimum of five years after the year of a person's first contribution to their Roth IRA. It is also possible for a qualified distribution to be associated with an individual becoming disabled, dying, or meeting the requirements of buying a home for the first time.
• Contributions are not tax-deductible 
• An individual's contribution deadline is their tax return filing deadline. This does not include extensions.
• Roth IRAs are an excellent investment for young adults beginning their working career. Having a low income maximizes the tax advantages for a Roth IRA.

If someone meets the income requirements for a Roth IRA, it is an excellent idea to open one and begin investing in it. This is a good idea even if someone has not yet created a retirement strategy. It could be part of a person's plans when prioritizing their financial goals. People can access their contributions in a Roth IRA at any time they want. Regular contributions to a Roth IRA will create a steady stream of tax-free retirement income. They will also benefit from the tax-deferred growth of their Roth IRA.