What Is A Roth IRA?

A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. Unlike a traditional IRA, there are no current-year tax benefits. But your contributions and earnings can grow tax-free, and after the account has been open for five years or more and you’ve reached age 59 ½, you can withdraw them tax-free and penalty free.

Most people save in pre-tax accounts like traditional IRAs and 401(k)s. This leaves them open to tax bombs during their retirement years. But if you also have a Roth IRA, you can pick and choose which account to take you money out of. For instance, if you usually take out the maximum amount from your 401(k) to keep you in the 12% tax bracket, but you need extra money one year to make a large purchase. If you take out of your Roth IRA, this money doesn’t push you up into a higher tax bracket.

What are the benefits of a Roth IRA?

• Earnings grow tax free.
• No age restrictions to contribute to a Roth IRA as long as you have a qualifying earned income.
• No require minimum disbursements.
• No income taxes on inherited Roth IRAs.

There are limits on how much you can contribute to a Roth IRA annually. Those limits depend on your Modified Adjusted Gross Income (MAGI). If you are a single or joint filer, your maximum contribution starts to reduce at $146,000 and $230,000 for tax year 2024. Like every aspect of retirement, there are a lot of rules with Roth IRAs. It can help to have a financial advisor and a CPA working together to make sure you don’t run afoul of these rules.

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