If you aren’t sure – a Roth IRA is a type of retirement account. I LOVE me a Roth IRA and I have since I was 20 years old. Why? Put simply, tax free growth and tax free withdrawals.
There is NO other investment vehicle like the Roth IRA. It goes something like this…first, you contribute after tax dollars into a Roth IRA. Second, you invest it and every dollar earned grows tax free. Third, your withdrawals are tax free to be used at your discretion. (Of course, like anything tax related…given you follow a few guidelines and are eligible to contribute as listed below).
Tax free growth is POWERFUL and eye opening when you look at the impact on an account over a long period of time. (I’m obsessed with numbers so there will be a new blog post coming soon to show the long term impact the Roth has vs. the traditional.)
Below you will find all the information you need to understand the Roth IRA concept, learn why I love it SO much, determine if you are eligible and decide if it may make sense for you as an investor.
Income Limitations: Your income eligibility is based on your MAGI or Modified Adjusted Gross Income on your tax return. Your MAGI accounts for all of your income sources – salary, investment income, business income, etc. and is offset by a few deductions. 2022 Roth Income Limitations are as follows:
Single Tax Filer: You may contribute up to the maximum contribution if your MAGI is below $129,000. Between $129,000 to $144,000 your eligible contributions begin to decrease. At $144,000 and above, you are no longer eligible to contribute.
Married Filing Jointly Tax Filer: You may contribute up to the maximum contribution if your income is below $204,000. Between $204,000 and $214,000, your eligible contribution begins to decrease. At $214,000 and above, you are no longer eligible to contribute.
Click on the following link to provide you with a visual that Charles Schwab gathered to show the Roth IRA Income Limits.
I could go on and on here but I think you get the idea, right?!
Exception to the early withdrawal penalty rule. l note this because I know emergencies come up and it’s important to understand ALL the information about an account and how it operates. But please remember the purpose of this account is to grow tax FREE for as long as possible. Try to remain mindful of that purpose!!
Luckily for you, you aren’t required to. You could let this money grow tax free for your entire life. Upon your passing you could use it as a generational wealth transfer tool to your family, friends or whoever you desire passing money down to.
Depending on your overall estate value when you pass, your Roth IRA may be able to pass to your beneficiaries tax free. Then upon their withdrawals, they would be able to withdraw tax free as well. I will save the estate planning thoughts for another post but at least this gets you thinking about it!!
The bottom line is I could argue that a Roth IRA makes sense for almost anyone who is both under the income limitations and who has earned income. If you are contemplating or questioning if this makes sense for you – please reach out to me and I’m happy to talk it over with you!
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