What is a Roth IRA? | IRA
A Roth Individual Retirement Account allows you to generate tax-free investment growth on your retirement savings. When you save for your retirement in a Roth IRA, you don’t have to worry about a big retirement tax bill because withdrawals are generally tax-free.
Here’s how to save for retirement in a Roth IRA:
- The Roth IRA contribution limit is $ 6,000 in 2021.
- For people 50 and over, the Roth IRA contribution limit is $ 7,000.
- The Roth IRA contribution deadline is the due date on your tax return.
- The Roth IRA income limits are $ 140,000 for an individual or $ 208,000 for married couples in 2021.
- Roth IRA contributions are not tax deductible.
- The growth of the investment in a Roth IRA is generally not subject to income tax.
- Roth IRA withdrawals at retirement are often tax exempt.
What is a Roth IRA?
A Roth IRA is a retirement account that allows you to benefit from tax-free investment growth on your retirement savings. While you don’t get tax relief in the year you make a Roth IRA contribution, you can make tax-free withdrawals in retirement and avoid paying income tax on your investments.
“Roth’s money is paid after-tax and growth is not taxed when it is distributed in retirement,” says Liz Sylvan, certified financial planner for Cultivating Wealth in Brooklyn, New York.
How Roth IRAs Work
Roth IRA contributions are made with after-tax dollars, and there is no tax deduction in the year you make the contribution. The funds in a Roth IRA grow without being taxed. Withdrawals made after the age of 59 and a half from accounts at least five years old are exempt from tax. Many people do not have to pay income tax on the growth of the investments they accumulate in a Roth IRA.
“You pay tax now, then your assets in the Roth grow tax-free, and distributions in retirement are tax-free,” says Kyle Hill, chartered financial planner and founder of Hill-Top Financial Planning in Kansas City, Missouri.
Roth IRA contribution limits
You can contribute up to $ 6,000 to a Roth IRA in 2021. People 50 and over can make additional catch-up contributions of up to $ 1,000 for a total Roth IRA contribution of $ 7,000. Those who exceed these contribution limits will be subject to an excise tax of 6% on the amount exceeding the limit. You can avoid the penalty by withdrawing the excess contributions before you file your tax return.
Roth IRA contribution deadline
Roth IRA contributions must be made before your tax return due date, which is usually around April 15 of each year. If you make a contribution between January and April, you can choose to apply the deposit to the previous tax year or the current calendar year.
Roth IRA income limits
Workers must earn below certain income thresholds to be able to save for retirement in a Roth IRA. Those earning less than $ 140,000 as an individual or $ 208,000 as a married couple are eligible to make Roth IRA contributions in 2021. The Roth IRA contribution amount is phased out for those with higher incomes to $ 125,000 as an individual and $ 198,000 as a married couple in 2021. However, there are several ways around these income limits by contributing to a traditional or 401 (k) IRA and then converting the funds in Roth.
How to open a Roth IRA
You can open a Roth IRA at most banks and financial institutions. When selecting a Roth IRA provider, be sure to consider the investment options available and the fees associated with the account.
“With a Roth IRA, you have a full menu with thousands of investment options,” says Hill. “You can also minimize fees and find a Roth IRA where it costs you next to nothing to invest.”
What to do with a Roth IRA in retirement
You can generally receive penalty-free and tax-free distributions from your Roth IRA after age 59 1/2. Unlike a traditional IRA, you are not required to make withdrawals from a Roth IRA at retirement.
“Because there is no minimum payout required with a Roth, you can keep investing and let it grow your wealth and possibly pass it on to your children,” says Narumi Yoshida, Founder and CEO of Yoshida Wealth Management in White Plains, New York. . The money can accumulate in the account until you need it, or you can leave the funds to the heirs.