It’s important to be smart when choosing retirement savings accounts. The Roth IRA is an individual retirement account that grows your retirement savings tax-free. Tax-free growth is a major plus to retirement savings. A Roth IRA can be an excellent addition to your retirement portfolio. Continue reading for 5 things to know about the Roth IRA.
1. How they work
It can be confusing to understand how funds in Roth IRAs grow tax-free. Here’s how it works: you pay taxes on your contributions, allow your money to grow for at least 5 years, and when you’re ready to take withdrawals, it is taken tax-free. There are also options to withdraw funds in an emergency, tax-free and penalty-free.
2. Benefits of a Roth IRA
There can be many benefits to utilizing a Roth IRA for retirement savings:
- Tax savings by paying taxes now on contributions, rather than later on withdrawals, when your tax rate may be higher.
- Being able to withdraw your contributions without taxes or penalties.
- Flexible timing so you can choose when to contribute to a Roth IRA.
- Additional time to contribute to your Roth IRA. You have until the income tax filing deadline to contribute for the previous tax year.
- Roth IRAs do not require you to take minimum distributions that other retirement accounts force you to take.
3. Who can open a Roth IRA?
There are two requirements to open a Roth IRA; you must be under the income limit in addition to having earned income.
To contribute to a Roth IRA, your adjusted gross income for 2021 must be under $140,000 for single filers or under $208,000 for married people filing jointly. The limits increase in 2022 to $144,000 for single filers and $214,000 for joint filers.
You must also have taxable compensation. The maximum you can contribute to a Roth IRA in a year is your total earned income or $6,000 ($7,000 if you are age 50 or older), whichever is less.
4. How to open a Roth IRA
To open a Roth IRA, you need to start by deciding how you want to manage your account. You have three options: banks, robo-advisors for a hands-off approach, and traditional brokerages with an active approach.
Choose one of these account management options that works best for you. Be sure to check the fees that could be incurred that go along with the account.
Once you have an account that works for you, start investing as soon as you are able. If you are choosing a hands-on investment strategy, consult with your advisor on investment options. Time is on your side when it comes to retirement savings, so try to add money to your Roth IRA over time so it can continue to build and compound.
5. The difference between a Roth IRA and Traditional IRA
Roth IRAs and Traditional IRAs are very similar retirement accounts. The biggest difference is on which side you receive the tax advantage. Since Roth IRAs are funded with money that is already taxed, the contributions are not tax-deductible. However, your withdrawals are tax-free. With a Traditional IRA, contributions are made with pre-tax dollars that gives you a tax deduction.
If you are interested in learning more about how a Roth IRA could benefit you and your retirement portfolio, contact us at Wolfe Financial. Our advisors will be able to sit down with you to see what retirement accounts are in your best interests. Call us today to get started!