Taking a closer look at the Roth IRA

Wouldn’t it be nice to have an account available to you where you can put money in and:

  • Earn a higher interest rate than a traditional bank savings account
  • Pull your money out when you need it without [IRS] penalties
  • NOT be forced to have to take the money out when you’re 70 ½ (and still be able to contribution after 70 ½)
  • AND….Be TAX FREE to you in retirement and/or when passed along to your beneficiaries at your death?

If you’re looking for any of these options, then a Roth IRA may be your best option!

Roth IRA Basics:

  • Contributions are made with after-tax funds and a not deductible (like Traditional IRAs)
  • You can make contributions after 70 ½ (so long as you have earned income)
  • There is not Required Minimum Distributions on Roth IRAs, so you can leave amounts in your account as long as you live
  • Qualified Distributions are Tax-Free!

Now, not *everyone* can contribution to a Roth IRA. However, if your AGI is less than $193,000 and you’re filing Married Filing Jointly, OR less than $122,000 and you’re filing Single, Head of Household, or Married Filing Separately and did NOT live with your spouse at any time during the year, than you can contribute the full limit of $6,000 ($7,000 for those 50 and over) for 2019.

Over these limits you will either have a reduced amount you can contribute OR not be able to contribute at all. Also, contributions limits to Traditional IRAs and Roth IRAs are aggregate, so you can only do a TOTAL of $6,000 ($7,000 for 50 & over) between IRA and Roth if you happen to be contributing to both types of plans. (check out IRS publication 590-A for further information)

What makes a Distribution a “Qualified Distribution”?

  • Distributions made after the 5-year period from the first taxable year in which a contribution was made to set up a Roth for your Benefit. (Note: the clock starts ticking then and does not restart if you change/switch accounts or open another Roth IRA somewhere else)
  • The payment/distribution is:
    • Made on or after age 59 ½
    • Made because you are disabled (defined by the IRS)
    • Paid out as a Death Benefit to your Beneficiary(ies)
    • Meets the requirements listed by the IRS under their First-Time Home buyer exception (up to $10,000 per buyer)

If your distribution does not meet any of the options listed above, the GAINS on the Roth IRA are taxable and assessed a 10% pre-mature distribution penalty by the IRS. One very important thing to note is the taxation and subsequent additional 10% tax penalty is on the GAINS of your Roth IRA only. Contributions are NOT TAXABLE to you because you’ve already paid taxes on them. Additionally, those contributions are what come out FIRST when you take a distribution, so you are able to withdraw funds from your Roth IRA if you need to UP TO your total contributions with no tax consequences or IRS penalties.

Setting up a Roth IRA is Simple and Easy!

You do not have to contribute the entire $6,000 to establish a Roth IRA. You can start a Roth IRA for as little as about $50 per month. (That’s $12.50/week or about the cost of a Dunkin Donuts Coffee per day!) You have a ton of account options to choose from, so you can find the investment that fits your individual need. Plus, setting it up for automatic contributions each month will help you to “set it and forget it” and stay on track for your retirement goals!

Here’s to a Tax-Free Retirement!

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