When you think about retirement, you may feel overwhelmed. A financial advisor will throw out foreign terms like 401k, 403 (b), or 457(b). Another type of retirement account is a Roth IRA. Just like the other accounts we mentioned, the Roth IRA has advantages, restrictions, and tax implications. Let’s take a top to bottom look at what Roth IRA has to offer.
Roth IRA Basics
A Roth IRA is unique in several ways:
- The money invested in this IRA grows tax-free;
- You can contribute to the IRA past the age of 70 ½;
- In 2019 and 2020, the maximum contribution for someone under 50 years of age is $6,000 ($7,000 for those over 50);
- You can only use earned income to contribute to this fund. You cannot use funds from things like pensions, interest income, and income from rental properties.
Things to Know About Opening a Roth IRA
If you are considering a Roth IRA, you should make sure the bank, credit union, or brokerage company has IRS approval. FDIC insurance does cover this type of IRA, but your accounts combined on get $250,000 in coverage. For example, if you have an IRA with $100,000, a savings account with $100,000 and $100,000 in CD’s, $50,000 of your dollars are not insured.
Not Everyone Can Open a Roth IRA
To be eligible to open this account, a single person has to make less than $124,000 per year and a married couple filing jointly must make less than $196,000. Additionally, anyone opening a Roth IRA must have earned income (as discussed before).
Withdrawals from a Roth IRA
You are allowed withdraw any money you contributed to your Roth IRA at any time with no taxes or fees. However, if you choose to withdraw earning which the account has generated, there could be tax and fee implications. To avoid taxes and fees, one of the following must be true:
- The withdrawal has to be for a first home ($10,000) limit;
- The account holder must be over 59 ½ years of age; and/or
- The account holder becomes disabled.
This list is not all-inclusive. Additionally, there is a “five-year rule”. This means the Roth IRA must be open for a minimum of five years before the account holder can make a tax-free withdrawal. If the account holder makes a withdrawal before the five-year requirement is met, a 10% penalty is enforced. If the account has been open for five years, but none of the listed requirements are met, a 10% fee is enforced.
What Should You Invest in With a Roth IRA?
Your Roth IRA can generate or earn money for you. The amount fluctuates with the stock market just like other investment accounts. Most financial experts suggest a mix of mutual funds. Mutual funds have performed on par or better than the S&P 500 for the last 50 years.
If you are ready to get serious about retirement, you already have accounts set up, or you are in tax trouble, you need the guidance of an experience attorney. The attorneys at Dsouza Legal Group have been helping people earn and maintain financial freedom for over 15 years. Contact Dsouza Legal Group today for a free consultation.