The Short Guide to Roth IRAs

What is a Roth IRA?

You have probably heard about IRAs before. However, there are actually two types of IRAs, and the differences between the two are significant. Traditional IRAs let you save for retirement using pre-tax dollars. Your contribution reduces your taxable income, so you pay a little less in taxes now than you would if you didn’t invest in the IRA. You don’t pay taxes on the money you invest, but you do have to pay taxes on any withdrawals you take at ordinary income tax rates.

Roth IRAs are entirely opposite. You invest in a Roth IRA using post-tax dollars. Because of that, you are not going to get hit with a high tax bill later. Earnings in your Roth IRA will not be taxed. What you see on your balance is what you get in after-tax dollars. While the tax-free nature of a Roth IRA is its most important benefit, the Roth IRA comes with a couple other benefits worth mentioning.

Access to Your Investment

One of the biggest defining characteristics of Roth IRAs – other than their post-tax nature – is that you can access your money without penalty in certain situations. This could involve purchasing a home if you are a first-time buyer. You can also take penalty-free withdraws to pay for medical expenses or cover your health insurance premiums if you find yourself unemployed before you reach retirement as long as you meet certain requirements.

Required Distributions

Roth IRAs also do not have required distributions. When you invest in a traditional IRA or a 401k, you are going to have to start taking required minimum contributions when you reach 70½. It doesn’t matter if you need the money or what your tax situation is. Roth IRAs save you from that fact. There are no required distributions, so that money can continue to grow.

Conclusion

Roth IRAs can be such a benefit to developing a good retirement plan – but this investment type is not designed for everyone. For 2019, married couples need to have an adjusted gross income of $193,000 to be able to contribute the full $7,000 per year. Single taxpayers can make up to $122,000. If you make more than those figures, you may not be eligible for a Roth IRA, or you will be limited as to how much you can contribute.