Retirement

All About Roth IRAs & Why I Love Them

Roth IRA

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.

Top 3 Benefits of the Roth IRA

  1. Tax FREE growth and tax FREE withdrawals
  2. Your withdrawals are to be used at your discretion and do not have to be used for a specific purpose – like education, etc.
  3. No required minimum distribution. You are not forced to withdraw funds at a particular age like you would be if you had a Traditional IRA or traditional employer retirement plan. With that said, the Roth IRA could be used as a substantial generational wealth transfer tool.

Roth IRA Eligibility

  1. Income Limitations – See below.
  2. You must have earned income – salary, wages, compensation in some form. (Check FinPowered Female’s Instagram post related to the exception to this rule if you are married & file your tax return jointly)


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.

Who Should Be Considering a Roth IRA?

  1. Despite your age, if you are under the income threshold and earning money, you should be considering opening or contributing to a Roth IRA.
  2. If you are a parent and your child is earning income from their first job or summer job – you are able to open an account on their behalf as a custodial Roth IRA and begin adding to it.
  3. If you are 60+, still working, have no intention of retiring soon, and have no need for some of the cash you have on hand for years to come – you could be considering a Roth IRA.

I could go on and on here but I think you get the idea, right?!

How Do Contributions Work?

  1. Per 2021 IRS guidelines, you are able to contribute up to $6,000 per year into an IRA account. $7,000 if you are 50 or older.
  2. You are able to contribute to an IRA account as well as a 401K (or any employer sponsored retirement plan)
  3. You are not able to contribute in excess of the maximum contribution to an IRA account. For example, if you have a Traditional IRA and a Roth IRA – you are able to contribute $6,000 in total, not $6,000 to each.
  4. After you contribute into the Roth IRA, you then must INVEST! I have seen too many clients, friends and family tell me that they contributed but never invested. Please invest this money that you have contributed! That is the only way to actually receive the full benefit of the Roth IRA.


How Do Withdrawals Work?

  1. You are able to withdraw funds from a Roth IRA after age 59 1/2 – penalty and tax free if the below apply.
  2. You must hold the account for a minimum of 5 years in order to receive tax free withdrawals of earnings.
  3. If you withdraw money from a Roth IRA prior to turning 59 1/2, and not for a reason related to one of the exceptions below, you will trigger a 10% penalty. You may also be responsible for paying tax on the earnings you generated in the account depending on how long you have held the account for. (Must hold for 5+ years)
  4. There are no required distributions (in a 401K or Traditional IRA, you are required to begin taking minimum distributions at age 72). A Roth IRA could grow and grow and be used as a generational wealth transfer tool.
  5. You are able to withdrawal your principal contributions at any time, penalty and tax free.



What If I Need the Money Prior to Age 59 1/2?

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!!

  1. First Time Home Purchase: You use the withdrawal (up to a $10,000 lifetime maximum)
  2. Qualified Education Expenses
  3. Qualified Expenses Related to Birth or Adoption
  4. Disability or Death
  5. Unreimbursed Medical Expenses or Health Insurance if Unemployed


What If I Never Need to Withdraw The Money?

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!

Resources:

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