A Roth IRA is a very popular term related to bank accounts, especially if you are starting to think about saving money for retirement. If that is your case, you might need to know about some solid options.
Read on and find out the details you need to understand if you’re thinking about opening a Roth IRA account.
What Is a Roth IRA?
A Roth IRA is an account for individuals, and you can use it to withdraw funds without worrying about taxes since it is free from them.
It’s not just the withdrawals either. Each time you contribute to it, you can safely store money without paying federal taxes.
If you expect to be in a high tax bracket in the future, having a Roth IRA account might be very beneficial for you. However, you should know all the details that it offers you. That way, you can be confident in your choice.
Who Can Open It?
Not everyone can open a Roth IRA account, but many people can. The first thing to keep in mind is that there are not any age restrictions. Therefore, you can be any age as long as you fulfill the income requirements.
To contribute to a Roth IRA account, your income cannot exceed the limit. In 2021, your modified adjusted gross income should be under $140,000 if you are a single filer and $208,000 if you are married and filing jointly.
The IRS also states that you need to have taxable compensation. In other words, you need to work and have an income. With that, you can contribute up to $6,000 a year, or $7,000 if you are 50 or older.
How Does It Work?
With this individual retirement account, you want to bear the following factors in mind:
If you’re at least 59 and a half years old and have had your account for at least five years, you can take distributions without paying federal taxes.
You don’t have to withdraw money from your Roth IRA account unless you want to.
When you contribute to your account, it is assumed that you already paid taxes on your contribution, which is something that is called “post-tax money.”
Unlike other types of IRAs, Roth does not require you to be a minimum of 72 years old to start taking a minimum distribution. Thus, it is very convenient if you want to begin earlier.
How Can You Open It?
You need to contact a bank or brokerage to open your Roth IRA account. Then, all you need to do is to invest your money. Luckily, there are different options for that too. Some of them are the following:
- Exchange-traded funds (ETFs)
- Mutual funds
- Bank savings products
If you want to invest your money in bonds or stocks, you should go to a brokerage or robo-advisor instead of a bank.
You don’t have to worry about the amount of money you contribute at first. It is alright if you have no desire to invest much. As long as you don’t exceed the $6,000 or $7,000 limit, you can enjoy the benefits of having a Roth IRA account.
How Withdrawals and Distributions Work
Opening a Roth IRA account is a crucial step because it lets you save money for retirement. Even so, you need to know everything about how distributions and withdrawals work.
First, keep in mind that you can withdraw your original contributions whenever you wish to do so. If you make that choice, there are, of course, no penalties.
Each time you withdraw money from your account, the IRS assumes that you are retiring your original contributions first.
Your withdrawals are only completely tax-free as long as they are qualified. In other words, if you get them out early or don’t fulfill the IRS qualifications in any other way, then the regulatory body might want a part of the money, which may happen in the form of tax payments or penalties.
Disadvantages of Roth IRA
Having a Roth IRA account has some downsides. On one hand, if you withdraw money too early (before the age of 59 and a half years old), the IRS might mandate a ten percent penalty.
On the other hand, you cannot ask for a loan like you can with other account types. If you have a Roth IRA, you need to withdraw your money to be able to use it. Thus, if you are younger than the specified age, then you need to pay the penalty.
Benefits of Roth Ira
Although there are some disadvantages, the benefits of having a Roth IRA are much more attractive. Look at some of them:
- It can help you save tax money. If you contribute money now, you spend less in taxes than you would have if you would’ve done it later.
- It’s very easy to withdraw money from a Roth IRA account.
- You have much time to contribute. You can make your contribution up until the tax deadline.
- You don’t have an age limit to open an account.
- You can enjoy tax-free distributions.
- It offers you very flexible options for your contributions. You can choose to deposit $6,000 on the first day of the year or split it into different parts.
As you can see, having a Roth IRA can give you many benefits, especially if you’re looking for a flexible account type that lets you contribute without having to worry about taxes.
How Much Money Do You Need If You Want a Roth IRA?
Some robo-advisors and brokerages have $0 minimums to open a Roth IRA, while in other cases, you need some money. However, it completely depends on where you want to open your account.
A Roth IRA is a great option for people who are looking for a flexible account to begin saving money for their retirement. Although it has some disadvantages, it can be what you’re looking for. There’s no reason to rule out the possibility of getting one without first understanding how doing so can be a great thing for you.