Roth IRA Overview

Investing money in retirement is imperative for your future's well-being. Investing in your retirement will ensure you can live comfortably when you are no longer able or willing to work. But with so many different retirement accounts it can be hard to choose which retirement savings account works best. Whether it be a 401(k) offered by your employer, solo 401(k), 403(b), a traditional IRA, Roth IRA, you want to be sure you are maximizing your growth potential for the life of that retirement account. A Roth IRA combines the function of a traditional savings account but with unique benefits that set it apart from the others. So the question is, what is a Roth IRA?Start reading to discover the answer.

What Is A Roth IRA?

A Roth IRA (individual retirement account) is a retirement savings account in which individuals contribute their after-tax dollars. This means when they are ready or need to withdraw, they can collect their contributions (but not the earnings on the contributions) tax-free. Individuals can contribute their after-tax income at any age provided they are earning it from paid employment. Roth IRAs are great investments for those who believe the tax rate will have increased by the time they are ready to retire or need to withdraw from the account. They can also help some wealthier individuals who may want to leave a tax-free inheritance to their heir.

Continue reading to reveal precisely who is eligible to contribute to a Roth IRA now.

Eligibility

While the Roth IRA is a great choice as a savings account, not everyone is eligible to make contributions to one. Individuals must meet requirements based upon their tax filing status in order to be eligible for a Roth IRA. The requirements as of 2018 are as follows:

Married individuals who jointly file their taxes must have an income less than 189,000 dollars per year to make the maximum contribution to this account. Those who file single must make less than 120,000 dollars for the maximum contribution. There is also the opportunity to make a partial contribution in both cases, and this opens up Roth IRAs to individuals and married couples with slightly higher incomes. For partial contributions, married couples must earn less than 199,000 dollars (but above 189,000 dollars), and single individuals less than 135,000 dollars (but above 120,000 dollars). It is advisable to speak with a financial advisor before dealing with a Roth IRA to verify your eligibility requirements.

Continue reading to learn more about the maximum contribution amounts individuals and couples can make to a Roth IRA.

Max Contributions

Each year eligible individuals can contribute up to a certain amount of their after-tax income to their Roth IRA. There is no minimum amount required, though the max contribution is 5,500 dollars of after-tax income per year, until age fifty, where those individuals can contribute up to 6,500 dollars per year. Of course, these dollars must be earned income, which is any income individuals receive for services performed. This includes wages, self-employment income, salaries, tips, commissions, and bonuses. Earned income for Roth IRAs typically does not include interest, dividends, or pensions.

Continue reading to learn about the detailed advantages of Roth IRAs.

Advantages

The biggest advantage of a Roth IRA is when you decide to withdraw funds after putting money into this retirement account for years, it is completely tax-free. As stated, the money contributed is from after-tax income, which means it has already been taxed. Additionally, since the tax rate could also be higher than what it was when you contributed the funds in the first place, you may also be saving money that way.

Another advantage is individuals can withdraw their contributions at any time since they deposited the funds after they were taxed. Of course, there are small penalties for withdrawing all of the money early, though there is also a certain amount individuals can access penalty-free if necessary. However, the earnings from those contributions (i.e., interest and dividends) are not eligible for withdrawal at this point.

These two advantages are major benefits because other retirement savings accounts require penalties for removing any earnings early. However, as is clear, there are some disadvantages and limitations to Roth IRAs. Continue reading to reveal details on this.

Disadvantages

While the Roth IRA is a great retirement savings account, one of the major disadvantages is there are income restrictions regarding who is eligible to participate in this type of retirement account. It also depends on how an individual files their taxes (i.e., single, married filing jointly, or married filing separately). Another disadvantage is the cap on yearly contributions (previously discussed). Thus, even for those who can put more money away, they cannot exceed 5,500 dollars. Anything beyond this amount must be placed in a different account without the shelter from taxes.

The final disadvantage has to do with a lack of tax deductions. Typically, contributions to a retirement savings account qualify individuals for a tax deduction when filing their taxes. However, because taxes are withdrawn at the time someone contributes to their Roth IRA, they are unable to file a tax deduction.