The Roth IRA started in 1997 and it changed the retirement savings game.
It’s probably my most recommended retirement savings vehicle, other than your employer-sponsored plan of course. You have to get that match!
The Roth IRA can be your primary retirement account or a nice complement to a work-based plan.
Here’s why I love the Roth IRA.
Tax-free withdrawals! That’s right, if you save for retirement using the Roth IRA, you get to take that tax-deferred (don’t pay taxes while money grows) savings out of your account without paying taxes.
While you’re working, you generally have two options (besides contributing to your 401k or Simple IRA) do I contribute to a Roth IRA or a Traditional IRA? The amount of money you make plays a little bit of a factor, as the Roth IRA has an income limit ($137,000 – single, $203,000 – married filing jointly).
However, a back-door contribution is available. That’s where you make a contribution to a traditional IRA and roll the money from there into a Roth IRA. Be advised: You’ll be taxed at the time of the rollover.
That aside, contributions to a traditional IRA are tax-deductible (an income limit applies here). Conversely, contributions to a Roth IRA are not tax deductible.
Here’s why I like to recommend the Roth. I’d save for retirement, without getting that tax-deduction and pay $0 taxes upon withdrawal in retirement. At that point in time, your ability to earn more money is either dramatically reduced or gone completely.
It’s at this point when you need that money the most. I’d rather pay for it now and benefit from it later.
With all that said, I suppose I should list all the characteristics of a Roth IRA.
- For 2019, the contribution limit is $6,000. If you are 50 or older, you can contribute an extra $1,000. Be advised: these contributions limits change often. Consult the IRS website for up to date information.
- Because the money in the account was already taxed, there are no mandatory withdrawals. Uncle Sam got his cut already so you can let that baby grow for as long as you want.
- If you withdraw before 59 1/2, you’ll pay a 10% tax penalty
- There are exceptions to this penalty, however.
- Use up to 10% on your first home purchase
- Pay for higher education
- Medical costs are more than 7.5% of your AGI
- Can pay health insurance premiums if you’re unemployed
- The IRS has a tax levy against you
- You can make contributions for the prior “tax” year up to April 15th.
- If you withdraw your savings within 5 years of your first contribution, you’ll pay some taxes on your withdrawal.
- Note: The 5-year clock starts ticking on January 1st of the year you made your first contribution
As I said, the Roth IRA is a great savings vehicle. Whether you use it on its own or use it as a complement to an employer-sponsored plan, it has a place in everybody’s retirement plan.
One last thing I want to mention. My reasoning behind why I recommend the Roth IRA so often is my personal belief. Please use your situation and your money/retirement philosophy when making this decision. It also pays to talk to a professional to see what they’re thoughts are, as well.