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Roth IRA

To make the most of our money, it’s important to take advantage of tax-advantaged accounts like Roth and Traditional IRAs. These accounts provide great benefits for your retirement funds. You can open these accounts through a brokerage of your preference like Fidelity or Vanguard. Roth and Traditional IRAs are very easy to open and manage. You can automate your investment and the money transfer from your bank to the brokerage. If you are a beginner and don’t know where to start, you can get my free beginner guide here.

A Roth IRA is a tax-advantaged individual retirement account that allows one to contribute after-tax dollars. the primary advantage of a Roth IRA is that contributions and earnings can grow tax-free and be withdrawn tax-free after age 59½ if you meet certain conditions. That is, the five-year holding period has been satisfied, and one of the following conditions is met: age 59½, death, disability, or qualified first-time home purchase. Another great advantage is that if needed, you can withdraw your contributions tax and penalty-free at any time, for any reason.

Investing information provided in this blog post is solely for educational purposes. Neither IsaveFuture nor its subsidiaries offer advisory or brokerage services, and we do not recommend or advise investors to buy or sell specific stocks, securities, or other investments.

Roth IRA income limits

Filing status	2023 Income range	Maximum annual contribution
Single, head of household, or married, filing separately, and you did not live with your spouse at any time during the year.	Less than $138,000.	$6,500 ($7,500 if 50 or older).
	More than $138,000, but less than $153,000.	Contribution is reduced.
	$153,000 or more.	No contribution is allowed.
Married filing jointly or qualifying widow(er)	Less than $218,000.	$6,500 ($7,500 if 50 or older).
	More than $218,000, but less than $228,000.	Contribution is reduced.
	$228,000 or more.	No contribution is allowed.
Single, head of household, or married, filing separately, and you did not live with your spouse at any time during the year.	Less than $10,000.	Contribution is reduced.
	$10,000 or more.	No contribution allowed.

source

Here are some benefits of a Roth IRA

The money invested grows tax-free.
You can withdraw the contribution tax and penalty-free.
When you withdraw your retirement funds, you won’t owe taxes.
Distributions will not be required at a certain age. This differs from the traditional IRA, which requires withdrawals beginning at age 72.
You can keep contributing to your Roth IRA past retirement age if you don’t exceed the income limits.
Beneficiaries who inherit your account will be able to withdraw funds tax-free as well.

Roth IRAs don’t require much money to open an account. You can start with as little as $50 in most cases.

There are two versions of the Roth IRA

Contributory Roth IRA

This is an account that you contribute to every single year. There is a limit to how much you can contribute, which changes yearly. You can access any money you initially put in the account without having to pay taxes or penalties, regardless of how long the money has been in the account. It’s imperative to emphasize that the earnings must be retained in the account for a minimum of five years and until the account holder reaches the age of 59 and a half.

Converted Roth IRA

You have a taxable or pre-tax retirement account and want to convert this money to a Roth IRA. The money you convert into a Roth IRA must stay in the account for at least five years. A 10% penalty may apply for any withdrawals made before the five years and additional income taxes.

A Roth conversion can happen in three different ways:

One way is moving your money from an employer-sponsored plan, such as 401(k) or 403(b), to a Roth employer-sponsored plan. In this case, the money stays in the employer-sponsored plan as a Roth IRA. If you have this option and are planning to convert, be aware that you will have to pay taxes on the money you convert.

A second way of converting is by transferring the funds from a traditional employer-sponsored plan to a Roth IRA. In this case, your money will no longer be in the employer-sponsored plan; it will be in a personal Roth IRA, where you can decide how to invest it.

Another option is to roll money from a traditional IRA to a Roth. This is an excellent option for people whose income is too high to be eligible for a regular Roth IRA. The strategy is known as “back door Roth” and is legal. The people who decide to do this process usually do it in stages because they have to pay taxes on the money converted.

Consider doing a Roth conversion only if you can afford to pay the tax bill with cash. Consider doing it in stages if you have a large sum of money. You don’t have to convert those retirement funds all at once. Instead, You can spread it over several years. This allows you to break down your tax obligation into a manageable size. Conversion can cost you thousands of dollars, especially if you convert a large amount. Why? Because it can place you in a very high tax bracket. You should always consult with your CPA or do your taxes online, so you can see how much money it will cost you.

When is it a good idea for you to convert

When you aren’t planning to touch the money for at least eight years.
When you have the income tax money that will be owned on your conversion.
If you are not planning on using this money and you want to leave it to your children, so when they inherit it, they won’t have to pay taxes since they will be in a higher tax bracket.
You don’t need the money now; you want to leave it there beyond age 72, the new required minimum distribution age for traditional IRA.
You expect your income tax bracket will be higher in the future
You want to feel confident that the money you have in the account is the money you will keep in retirement.

Who can contribute to a Roth IRA?

Anybody with an income can contribute to a Roth IRA. There are no age restrictions with Roth IRAs, so if you are 17 years old and earn an income you are allowed to contribute.

Anybody with an income can contribute to a Roth IRA. If you have taxable compensation and your modified adjusted gross income is below certain amounts you are good to go! See the table above to see the income limit.

Traditional IRAs

This retirement account is funded with pre-tax money. This means that you aren’t paying taxes on that money yet. However, you’ll have to pay the corresponding taxes when you withdraw in retirement. In most cases, the contributions are deducted from your tax return. The earnings grow tax-deferred (you delay paying taxes to some point in the future) until you withdraw them in retirement. Keep this in mind when considering a traditional IRA.

You’ll always pay income tax on the money you withdraw from your traditional IRA, regardless of age.
The earnings grow federal income tax-deferred.
The withdrawal age is 59 1/2.
Any withdrawal before age 59 ½ carries a 10% early withdrawal penalty if no exceptions apply.
When you turn 72, the IRS forces you to withdraw a certain amount each year (required minimum distributions). The withdrawals must start by April 1 of the year following your 72nd birthday, then by December 31 every year after that.

If you don’t take the full required withdrawal by the deadline, you will face a 50% penalty on the difference between what you should have withdrawn and what you did.

Between ages 59 1/2 and 72, you can withdraw or let the money grow tax-deferred.

If at age 59 ½ you’re not retired yet, and you expect you’ll be in a lower tax bracket when you do retire, it’s recommended that you let the interest compound so your money keeps growing. If you pass away, your account will go to your beneficiary.

Here are some exceptions to the 10% penalty

You contributed the money into another IRA within 60 days of the withdrawal.
You’re unemployed for 12 weeks or more, and the money was used to pay for medical insurance for you, your spouse, or your dependents.
When the withdrawal is used to pay for qualified higher education expenses for you, your spouse, dependents, or a beneficiary.
Qualified first-time homebuyers, up to $10,000. This includes building or rebuilding a first-time home.
You receive medical bills that total more than 7.5% of your Adjusted Gross Income (AGI), and you use the funds to pay it back.
You are a reservist called to active duty for 180 days or more.
You can withdraw up to $5,000 to assist with the birth or adoption of a child.

These are the difference between traditional and Roth IRAs

Roth	A Traditional IRA allows you to make pre-tax contributions
A Roth IRA allows you to make after-tax contributions	You’ll pay ordinary income tax on withdrawals.
Contributions grow tax-free	Contributions grow tax-deferred
Penalty and tax-free after 5 years and age 59½	Penalty-free but taxed as current income after age 59½
You can contribute at any age.	You can contribute at any age.
A Traditional IRA allows you to make pre-tax contributions.	You’ll never pay taxes on withdrawals.
There are no penalties on withdrawals of the contributions, but there’s a 10% federal penalty tax on withdrawals of earnings.	There’s a 10% federal penalty tax on withdrawals of both contributions and earnings.
have no required minimum distributions (RMDs) during your lifetime.	A Traditional IRA allows you to make pre-tax contributions

After all, Roth IRAs offer the best benefits since they allow you to withdraw your contribution early without penalty. Also, the money grows tax-free. This is not to say you should make withdrawals from your investment. Experts recommend you don’t touch it unless it is to avoid bankruptcy or for something of that extreme. Finally, make sure you invest in things you understand. Get my free investing guide for beginners here.