The Informed Investor
Roth IRAs are an excellent choice for retirement savings because they offer tax-free growth on investments, as well as tax-free withdrawals. Whether you already have a Roth IRA or you’re considering one, here’s what you need to know.
There Are Variable Contribution Limits
First, it’s important to know the contribution limits for each year, as they can change from one year to the next. In 2021, the contribution is $6,000 for those under the age of 50, and $7,000 for those who are 50 and older, assuming your modified adjusted gross income is below $140,000 for single filers or $208,000 for married couples who file jointly.
You Will Profit from Future Tax Benefits with a Roth IRA
One of the reasons Roth IRAs are recommended for those who are eligible is their significant tax benefits. Anyone who has earned income can open an IRA. That includes people who have a 401(k) through an employer. The only limitation is on the combined total that they can contribute in a single year to those retirement accounts while still getting the tax advantages. Anyone who is 59 1/2 or older and who has an account for at least five years can withdraw money from their Roth IRA without paying any federal taxes. This is because the taxes on your investment are paid upfront; even as your money compounds, no additional taxes are owed. You won’t pay any federal taxes on your distributions and earnings.
If you have reason to believe your tax rate will be higher in the future, a Roth IRA allows you to contribute to your retirement savings now, while your tax rate is lower. There is a significant benefit to future tax-free withdrawals from your Roth IRA.
Fewer Penalties for Early Withdrawal
Generally speaking, it is not prudent to withdraw from a Roth IRA or any other retirement savings account before you’ve reached the required age. That said, if there are extenuating circumstances that require a withdrawal, a Roth IRA allows you to do so without having to pay taxes or penalties. The caveat here is that you can only withdraw from your contributions without penalty—if you need to also withdraw your investment earnings, there is a 10% penalty in most cases.
Roth IRAs Offer More Flexibility
There is a lot of flexibility built into the Roth IRA program:
- You can contribute to a Roth IRA and a 401(k), up to the annual allowed limits. The website https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021 can provide you with the limits set each year.
- You can choose how you contribute to your Roth IRA, whether it’s a lump sum or you split your contributions throughout the course of the year.
- You don’t have to make your annual contribution until the tax deadline for the previous calendar year.
- Roth IRAs have no minimum distribution requirements
- Children under the age of 18, with earned income, may open a custodial Roth IRA.
You Can Lose Money in a Roth IRA
It’s important to remember that a Roth IRA isn’t a savings account—it’s an investment account. Like any investment, it can lose money. This is why it’s important to work with a financial advisor you can trust. At ICC, we adhere to the fiduciary standard, which means we have no financial incentive to steer you towards investments that aren’t in your best interest. Investments are always a risk, but this risk is lessened when you work with a team that puts your financial needs first and discloses or has no conflicts of interest.
Learn More About Roth IRA Accounts
If you have $3 million or more in investable assets and would like to learn more about Roth IRA plans, our financial advisors are here to help. ICC provides clear and unbiased guidance for its clients, backed by a team of experienced fiduciary, financial experts. Contact us today at 702-871-8510 to learn how our team can help you.
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