A Roth IRA is an individual retirement account where contributions are made with after-tax dollars; unlike the typical or “regular” IRA funded with tax deductible contributions up to a certain amount. While losing that tax deduction at the front-end of the savings window may seem costly, the Roth IRA gives you the opportunity for tax-free growth and, though it may change in the future, it does not require required minimum distributions that come with other IRA savings.
Some of the Contribution Rules:
- Contributions are limited each year to no more than earned income;
- Contribution limits:
o Up to $6,000 (for those under 50 Years Old)
o Up to $7,000 (for those age 50 or older)
- Income limit eligibility to be able to participate in Roth IRA:
o Single – up to $125,000 (2021) income
o Married Filing Jointly – up to $198,000 (2021)
One key difference between an IRA and Roth IRA is that Roth IRAs have income limits, meaning if your household MAGI (Modified Adjusted Gross Income) is over $198,000 (for Married Filing Joint filers) or $125,000 (for Single filers) you cannot make traditional contributions to a Roth IRA. There are alternative methods which permit funding, but those should only be pursued with careful analysis, and for that reason we recommend you speak with a financial advisor and tax professional.
A Roth conversion occurs when you direct the transfer of tax deferred funds from an IRA and alter those funds (also referred to as converting) into a Roth IRA. When the transaction occurs, it creates a taxable event, causing you to pay the taxes on the funds moved from the IRA to Roth IRA. In the appropriate unique situations, this can benefit the investor in several ways, and possibly get you around the income limits of the Roth IRA.
Required Minimum Distributions:
Another key difference between IRAs and Roth IRAs is that Roth IRAs are not (as of publishing) subject to required minimum distributions (RMD). A RMD is the minimum amount you must withdrawal from your qualified retirement plan which generally begins at age 72. The amount is determined by IRS rules using life expectancy and account value in the computation. This can make Roth IRAs a crucial vehicle for estate planning.
A Roth IRA, like other IRAs are intended to be long-term retirement savings accounts. As a result, there are withdrawal rules that, among others, restrict use of the funds until investors reach age 59 ½ to avoid being penalized. Regardless of your age when opening a Roth IRA, the account must be open and funded for at least 5 years prior to making penalty-free withdrawals. This is one of the many reasons it is best to get a Roth IRA opened and funded as soon as possible.
As with most financial arrangements, there are many considerations to make before funding or withdrawing from what you have accumulated in a Roth IRA. However, for many people, contributing to a Roth IRA can make a lot of sense. I encourage you to investigate how one can work for you, and to seek professional advice to avoid unintended consequences.
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Executive Wealth Management, LLC is a registered investment advisor with the securities and exchange commission. Reference to registration does not imply any particular level of qualification or skill. Advisory services offered by investment advisor representatives of Executive Wealth Management. Brokerage products and services offered by Registered Representatives of Private Client Services, LLC member FINRA/SIPC. Executive Wealth Management and Private Client Services are unaffiliated entities. Topics discussed in this article may not be appropriate for all individuals. It is important that you discuss your long-term care options with a qualified professional.