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What You Need to Know About ROTH IRAs

Roth IRA retirement

Planning and saving for retirement can seem pretty complicated, especially because you may change jobs several times throughout your working years and might not be able to rely on a pension from an employer. When it comes to retirement accounts, you have a few options. If you earned taxable income during the year, you can open or contribute to an individual retirement arrangement, or IRA, whether your employer offers a retirement plan or not. There are two types of IRA: a traditional and a Roth. Compared to traditional IRAS, the Roth offers several benefits.

Pre-Paid Tax

Usually, when you contribute to a retirement account, such as a 401(k) offered through your employer, or traditional IRAs, you can deduct the amount you contribute from your taxable income for the year, reducing the amount of tax you owe. You then pay tax on your earnings and contributions when you withdraw them in retirement.

You can’t deduct the contributions you make to a Roth from your taxable income for the year. Instead, any contribution you make is after tax. When you retire, sometime after the age of 59.5, you are able to withdraw your original contributions, plus any earnings, without paying additional tax on them. You’ll have a higher tax bill in the present, but might save yourself a considerable amount of money in the future, when you don’t have to pay extra tax.

Contribution and Income Limits

There are some limits and rules when it comes to a Roth. As of 2015, the maximum amount you can contribute to any IRAs you have is 5,500 dollars for the year. That means if you have both traditional and Roth IRAs, you’ll need to divide up that 5,500 dollars between the two. If you’re over the age of 50, you are able to contribute an additional 1,000 dollars to your IRAs during a single year.

Not everyone can contribute to a Roth. The Internal Revenue Service limits the amount you can contribute, based on income. If your adjusted gross income is more than 131,000 dollars for a single person or more than 193,000 dollars for a married couple filing jointly, you can’t contribute to a Roth for the year.

Withdrawing the Money

The money you set aside for retirement is meant to be there for you when you retire. For that reason, if you withdraw money from a 401(k) or traditional IRA before you turn 59.5-years-old, you need to pay a 10 percent tax penalty. That isn’t always true for Roth IRAs, though. Since you’ve paid tax on them already, you are able to withdraw any contributions you made, at any time, without a penalty.

You need to leave the earnings on the account, alone, though, as those are usually subject to the penalty tax. There are some exceptions to that rule. You’re allowed to withdraw up to 10,000 dollars without a penalty to purchase your first home, for example. You can also use your contributions and earnings penalty-free, before you’re 59.5, to pay for college, pay medical expenses above 10 percent of your income or to pay back taxes. There are also exceptions in the case of death or disability. Although there’s no penalty, it’s usually a good idea to tap other sources of savings before you reach for your retirement fund.

Roth IRAs are a flexible retirement savings option that give you a source of tax-free income when you do retire. While you might not want to have a Roth be your only source of retirement income, opening one can usually be beneficial to you now and in the years to come.

Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today

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