What’s the biggest misconception about Roth IRAs?

Yes, there are two five-year clocks applicable to Roth IRA distributions. But neither of them impact a distribution of annual contributions from a Roth IRA.

Annual contributions to a Roth IRA can be withdrawn at any time for any reason tax and penalty free!

I previously posted about the Roth IRA nonqualified distribution ordering rules:

This video, the show notes, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)

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When it comes to saving for retirement, many people turn to a Roth IRA as a key component of their financial plan. However, there are often misconceptions surrounding this popular retirement savings tool. One of the biggest misconceptions is that individuals believe they can’t contribute to a Roth IRA if they make too much money.

In reality, individuals of any income level can contribute to a Roth IRA. The only limitation is that there are income limits that determine whether or not you can contribute directly to a Roth IRA. For the 2021 tax year, the income limits for direct Roth IRA contributions are $140,000 for single filers and $208,000 for married couples filing jointly.

If your income exceeds these limits, you may still be able to contribute to a Roth IRA through a backdoor Roth IRA contribution. This strategy involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth IRA. This allows high-income earners to still take advantage of the benefits of a Roth IRA, such as tax-free withdrawals in retirement.

Another misconception is that you can only contribute to a Roth IRA if you have earned income. While it is true that you need earned income to contribute to a Roth IRA, there is no age limit for contributions. This means that even if you are retired and no longer working, you can still contribute to a Roth IRA as long as you have earned income from a job or self-employment.

Another common misconception is that Roth IRA contributions are always tax-free. While it is true that you contribute after-tax dollars to a Roth IRA, there are certain circumstances in which you may have to pay taxes on your withdrawals. For example, if you withdraw earnings from a Roth IRA before age 59 ½ and have not had the account for at least 5 years, you may be subject to taxes and penalties. It’s important to understand the rules and regulations surrounding Roth IRA withdrawals to avoid any unexpected tax consequences.

It’s crucial for individuals to educate themselves on the rules and regulations surrounding Roth IRAs in order to make informed decisions about their retirement savings. By dispelling these common misconceptions, individuals can make the most of the benefits offered by a Roth IRA and ensure a secure financial future in retirement.