Like other retirement savings plans, Roth IRAs allow you to save and invest money for your retirement. The key difference: your contributions to a Roth IRA are made with after-tax dollars. That means you’re taxed on the funds now, as you put them in. For a long-term tax strategy, this could be very useful.
Taxes and Roth IRAs
Although you can’t deduct contributions on your federal taxes as with a traditional IRA, the advantage is that after you retire, your withdrawals will be tax-free (as long as certain requirements are met) since you’ve already paid taxes on the money. So the Roth IRA may be a good choice for you if the potential for tax-free income in the future outweighs your need for a tax deduction today.
Roth IRA withdrawal rules
- Withdrawing principal – You can withdraw the money you’ve contributed to a Roth IRA 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you started your Roth IRA at least five years ago, then any money gained on top of the principal (your earnings) can be withdrawn tax-free.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 required
Another nice bit of flexibility: you don’t have to begin withdrawing 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, but the annual contribution limit applies to the total of all your accounts.
Before opening a Roth IRA, ask 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?
- Which investments in the 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 beyond the current tax year. Again, consult a trusted advisor.
Also remember, all investing involves risk, so there’s no guarantee you’ll reach your investment goals.