Like other retirement savings plans, Roth IRAs allow you to invest money that you’ll use when you retire. Roth IRA may be a good choice if the potential for tax-free income in the future is more important than a tax deduction now.
Enjoy Tax-Free Income in Retirement
Taxes and Roth IRAs
Contributions to a Roth IRA are made with after-tax dollars. That means that you can’t deduct contributions from gross income on your federal tax return as you could with a traditional IRA.
The advantage is that withdrawals are tax-free as long as they meet requirements.
Withdrawals from a Roth IRA
- Withdrawing principal – You can withdraw the money you’ve contributed income-tax free at any time.
- Withdrawing earnings – If you’re older than 59½ and you started your Roth IRA at least five years ago, then any money gained on top of the principal (your earnings) can be withdrawn tax-free. Otherwise, withdrawals may be taxable and could be subject to an early-withdrawal penalty.
- Withdrawals for special circumstances – You may be able to withdrawal earnings prior to age 59½ without penalty under certain circumstances. Ask your tax advisor to learn if your specific situation is eligible.
No minimum distribution requirement
You don’t have to begin withdrawals from your Roth IRA at 70½ as you do with a traditional IRA. You can leave your earnings in your account to continue growing income-tax free as long as you live.
However, when you die, your beneficiary will be required to take distributions. Money in your account could be subject to estate taxes.
There are some income limitations for Roth IRAs. You’ll find current limits on the IRS website. There is no minimum or maximum age for contributing to a Roth IRA.
You can contribute to a Roth IRA even if you participate in a retirement plan through your employer. You can open as many Roth IRAs as you choose, however the annual contribution limit applies to the total of all your accounts.
Before opening a Roth IRA, consider asking your investment professional or tax advisor these questions:
- Am I eligible to participate?
- Is a Roth IRA in line with my long-term investment objectives?
- What investments available through a Roth IRA are suitable for my investing style and timeframe?
- Will the tax rules of a Roth IRA work to my advantage?
Keep in mind that federal income tax laws are complex and ever-changing. The information presented here is based on current interpretations of the law and isn’t guaranteed.