Whether you are in your 20s getting your first job or in your 40s and looking to save a little extra, make sure you are well informed about your retirement saving options.
Roth IRAs are one way to save money. An IRA is an Individual Retirement Account. They allow you to deposit money after taxes. This means you do not have to pay taxes in retirement.
What Is a Roth IRA?
Roth IRAs are different from Traditional IRAs.
|Traditional IRA||Roth IRA|
|With a Traditional IRA you put in pre-tax money and get a tax break right now.||With a Roth IRA you put in post-tax dollars and get a tax break in retirement.|
Other important Roth IRA characteristics:
- As of 2021, contribution limits are $6,000 for singles and $7,000 for people over 50 years old if your income is below $125,000.
- Singles or married filing jointly who make between $125,000 and $140,000 are allowed to make a reduced contribution. See more here: https://www.buzzfeed.com/charisbarg/what-is-a-roth-ira
- For couples filing taxes jointly, you can each deposit your amount into separate accounts so long as your combined taxable income is less than $198,000.
- Contribution limits decrease up to $208,000. After $208,000, you can not have a Roth IRA.
What To Know About a Roth IRA?
If you are planning to open a Roth IRA you can do so at your local bank, credit union, online broker, robo-advisors, and traditional brokers.
There are some things you need to consider when making your choice:
- How much are you paying someone to maintain your account?
- How much are account transfer fees?
- Do they offer commission-free EFTs or mutual funds
Once you make your decision, go ahead and invest. You can invest whatever amount you want so long as it does not exceed the limit of $6,000 for anyone under 50 and $7,000 for anyone over 50.
You are not required to meet the max if you do not have that much to contribute over the year. You can contribute monthly, weekly, or whenever you can.
Pros of a Roth IRA
There are many benefits to having a Roth IRA.
- Tax-Free Withdrawals: You can make withdrawals without paying taxes since you used after-tax money to build the account.
- Tax Savings: You may be in a lower tax bracket now than you will be in retirement. Putting money in now means no taxes on the money later.
- Easy Withdrawals: You can withdraw your money at any time, so long as you are not withdrawing investment earnings before retirement. You are required to have the Roth IRA open for 5 years before withdrawing money.
- Flexible Contributions: You can contribute at any point during the year. You can contribute all at once or monthly.
- Multiple Accounts: You can have a 401K and a Roth IRA.
- No Age Limit to Open: You can open a Roth IRA at any time so long as you are contributing earned income.
- No Minimum Distribution Requirement: You do not have to start withdrawing a minimum amount at 72. You can begin withdrawals at any point.
Cons of a Roth IRA
There are a few downsides to a Roth IRA that are important to consider when making a retirement savings plan.
- There is no option to “borrow” money from your Roth IRA. With a 401(k), you can take a loan from your retirement account. However, since you can withdraw money at any time from a Roth IRA, so long as you have money in the account that was contributed (not earned from investments). Read more here: https://money.usnews.com/money/blogs/on-retirement/articles/2017-10-06/8-things-millennials-need-to-know-about-roth-iras
- You have to wait until 59.5 years old before you can pull out any of the investment income. If you pull investment income out early you will have to pay a 10% penalty.
- Roth IRAs have a maximum income limit. For singles or couples filing separately, you must make less than $125,000 to fully contribute or less than $140,000 to make partial contributions. Married couples filing jointly, have limits of $198,000 and $208,000.