Roth IRA Magic

What is a Roth IRA?

A Roth IRA is an individual retirement account (IRA) in which your investment grows tax-free. You can withdraw your contributions at anytime and income at qualified events penalty free.

Your contributions are made with after tax dollars which means that you don’t get any tax deduction in the year you contribute.

What are the Roth IRA income limits for 2022?

Roth IRA income limits for the 2022 tax year are $144,000 ($153,000 in 2023) for single or married couples filing separately and $214,000 ($228,000 in 2023) for married couples filing jointly. 

What are the benefits of a Roth IRA?

Tax-free income in retirement: You make tax-free withdrawals of both original contributions and growth after you are 59 and 1/2. This is a major advantage. If you decide to take one large lump sum, then you don’t have to worry about being bumped up to a higher tax bracket.

Easy withdrawals: You can withdraw contributions tax-free at any time from a Roth IRA. 

Tax-free and penalty-free withdrawal for first-home buyers: You can withdraw up to $10,000 of earnings from your Roth IRA without paying income tax or the early withdrawal penalty if you use the money for the purchase of your first home.

You can contribute to a Roth IRA as well as a Roth 401(k): If your income allows, then you can contribute to both. Flexible timing: You can choose to contribute to your Roth IRA whenever it suits you. If you are ahead in your savings, you could contribute the full $6,500 on the first day of the year.

Tax-free distributions: once you hit 59 ½ and have been contributing to a Roth IRA for at least 5 years, then you can make tax-free withdrawals of your earnings.

No required minimum distributions: Roth IRAs are exempt from RMDs. This means that you can leave the money in your Roth to pass on to heirs or a charity if you choose.

Contributions are allowed at any age: You can continue to contribute to a Roth IRA for as long as you like (as long as you meet income eligibility requirements) benefits of Roth ira.

What are the disadvantages of a Roth IRA?

The major disadvantage of a Roth IRA is that they do not include an up-front tax break. This is also the major difference between a Roth IRA and a pre-tax 401(k). There is also no automatic payroll deduction so you need to make sure that you remember to contribute each year.

How to Open a Roth IRA account?

IRA A Roth IRA can be established with any institution that has approval from the IRS to offer a Roth IRA. This includes banks, brokerage firms, credit unions, and loan associations.

Common Roth IRA questions:

What is Backdoor Roth IRA?

If your income is too high and you are ineligible to open a Roth IRA, you may still be able to contribute via a backdoor Roth IRA. A backdoor Roth IRA involves putting money into a traditional IRA, and then converting that account to a Roth IRA. In any year, you can convert as much of your traditional IRA to a Roth IRA as you want, as long as you pay the taxes on the earnings. There are several steps that need to be done to execute a backdoor Roth properly.

Can you have more than one Roth IRA?

Yes, you can have more than one Roth IRA. However, the combined contributions must not exceed the $6,500 ($7,500 for those aged 50 and older) contribution limit for 2022.

Can you contribute to a Roth IRA and a Roth 401(k)?

Yes, you can contribute to both a Roth IRA and a Roth 401(k).

How much money do you need to start a Roth IRA?

While there are maximum contributions to a Roth IRA each year, there are no minimum contributions. This means that if you want to contribute only $100 to start your Roth IRA, then you can (as long as you don’t make over the income limit). Some providers may require you to contribute more but you will be able to find some that will let you only contribute $100.

Can you lose money in a Roth IRA?

Yes, you can lose money in a Roth IRA. This is due to market fluctuations, not leaving the money in the account long enough to compound, and early withdrawal penalties. However, if you look at it as a long-term investment, then a Roth IRA is a great retirement savings plan.

What are some types of funds that aren’t eligible for a Roth IRA?

Some types of funds that aren’t eligible include rental income, interest income, stock dividends, and pensions.

How much should I put in my Roth IRA monthly?

If you want to max out your contributions for 2023, then you will contribute about $540 monthly. This amount will increase to around $625 monthly for individuals aged 50 and older.

Can you use a Roth IRA to fund a house purchase?

Yes, you can use a Roth IRA to fund a house purchase. You can withdraw your direct contributions at any time for any reason. You may be able to withdraw up to $10,000 of your earnings that can be used towards the purchase of your first home.

What happens if I inherit a Roth IRA?

If you are a spouse that has inherited a Roth IRA then you are never required to take minimum distributions. However, the SECURE Act recently changed the rules for non-spousal heirs. Non-spousal heirs are required to take minimum distributions and all of the funds must be liquidated within 10 years of the original account owner’s death. One thing to keep in mind is that the withdrawals are tax-free. This means that if you have inherited a Roth IRA and you wait until the 10th year to liquidate the money, then you will benefit from all of those additional years of tax-free growth. Roth IRA is a great retirement savings plan for you to consider since there are no required minimum distributions and you withdraw the money tax-free. A financial planner can help you decide if it is the right choice for you. Whether you want to open a Roth IRA, max it out, or if you are changing jobs, or a combination of all of these, we are here to help guide you.

If you are interested in having a comprehensive financial plan or have any additional questions about a Roth IRA, schedule a free discovery call with one of our fee-only financial advisors today.

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