May 10, 2024

5 Things to Know About Roth IRAs

Roth IRAs have become a common buzz word in the finance industry, and rightfully so! When the Roth IRA was first introduced in 1998 it created plenty of new and exciting ways to plan and save for retirement. While many people may have heard of a Roth IRA, they still may not understand fully what the point of a Roth IRA is. That’s why we have decided to highlight the 5 things you need to know about a Roth IRA. 

1) Tax Free Growth, Tax Free Withdrawals

Unlike traditional IRAs where contributions are tax-deductible, but withdrawals are taxed, Roth IRAs flip the script. You contribute after-tax dollars, meaning you don't get an immediate tax break. However, the magic lies in the growth: all investment earnings within the account grow tax-free.

2) When Can I Pull Money Out?

This is simplest to breakdown into 2 categories, your contributions, and your earnings. 

Your Contributions – In a Roth IRA you are always able to pull your contributions out tax free. You have already paid tax on these contributions. This flexibility can be a lifesaver for unexpected expenses or emergencies. Remember, though, that withdrawing contributions reduces your overall retirement savings potential. 

Your Earnings – There are 2 requirements that you need to have to avoid penalties on earnings. 1) The Roth IRA needs to be open for at least 5 years. 2) Withdrawals cannot be made before age 59.5. Once both of these factors are met you can pull out the earnings tax free. 

3) No Required Minimum Distributions (RMDs)

Unlike traditional IRAs where you must start taking withdrawals at age 73, Roth IRAs do not have RMDs. This means your money can continue to grow tax-free indefinitely, even after retirement. This flexibility allows you to strategize your withdrawals based on your needs and tax situation.

4) Eligibility and Contribution Limits

To contribute to a Roth IRA, you must have earned income and be under specific income limits. The contribution limit for 2024 is $7,000 if you’re younger than 50. If you are age 50 or older you can contribute an additional $1,000 per year “catch up” bringing your total contribution limit to $8,000. 

In 2024 the income limits are as follows: Single filers who want to make the full contribution can make up to $146,000. After this there is a phaseout range between $146,000 and $161,000. Married couples filing jointly who want to make the full contribution can make up to $230,000. After this there is a phaseout range between $230,000 and $240,000. 

5) Estate Planning Benefits

Roth IRAs offer valuable advantages for inheritance. Unlike traditional IRAs where beneficiaries face taxes on withdrawals, qualified distributions from inherited Roth IRAs are tax-free for non-spousal beneficiaries. This can significantly boost the value passed on to your loved ones.

*Bonus* Roth Conversions 

Already have a traditional IRA but prefer the tax-free benefits of a Roth? You can convert your traditional IRA to a Roth IRA through a process called a Roth conversion. However, be aware of potential tax implications, as the converted amount is considered taxable income in the year of conversion.

By understanding these key aspects, you can make informed decisions about whether a Roth IRA deserves a place in your retirement savings toolbox.  We’re happy to visit with you to build a financial plan to help you make the best decision between pre-tax and Roth retirement savings.

Disclosures:

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,500 total), $1,000 for IRAs ($8,000 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more
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