Episode 12 of Money & Stuff Podcast

Sam Rodriguez CFP® & Conor Shepard with a Roth IRA Recap – everything you need to know about Roth IRAs.

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Roth IRA Recap: Everything You Need to Know About Roth IRAs

When it comes to saving for retirement, there are several options available, and one popular choice among many individuals is the Roth IRA. Created in 1997, this retirement savings account has gained popularity due to its unique tax advantages and flexibility. So, if you’re considering opening a Roth IRA or want to learn more about it, this article will provide you with a comprehensive recap of everything you need to know about Roth IRAs.

1. What is a Roth IRA?
A Roth IRA (Individual retirement account) is a type of retirement savings account that allows individuals to contribute after-tax income. The key feature of a Roth IRA is that all qualified withdrawals are tax-free, including both contributions and investment earnings.

2. Contributions and Limits
For 2021, the annual Roth IRA contribution limit is $6,000 for individuals under 50 years old. If you’re 50 or older, you’re eligible for catch-up contributions of an additional $1,000, bringing the total to $7,000. However, it’s important to note that there are income limits for contributing to a Roth IRA. For individuals with a modified adjusted gross income (MAGI) of $125,000 or more ($198,000 for married couples filing jointly), the contribution limit starts to phase out and eventually becomes zero.

3. Tax Advantages
One of the main advantages of a Roth IRA is its tax treatment. Since contributions are made with after-tax money, you pay taxes on the money upfront. However, the key benefit is that all withdrawals in retirement are tax-free, including both contributions and investment gains. This is particularly advantageous if you expect your tax rate to be higher in retirement.

4. Investment Options
Within a Roth IRA, you have a wide range of investment options. You can choose to invest in stocks, bonds, mutual funds, ETFs, and even real estate investment trusts (REITs). It’s important to diversify your investments to mitigate risk and ensure long-term growth.

5. Withdrawal Rules
Another advantage of Roth IRAs is their flexibility when it comes to withdrawals. Unlike traditional IRAs, you can withdraw your contributions at any time without penalties or taxes, as they’ve already been taxed. However, withdrawing investment earnings before the age of 59 ½ may result in taxes and penalties unless specific exceptions apply. It’s recommended to consult with a financial advisor to understand the withdrawal rules and their implications.

6. No Required Minimum Distributions (RMDs)
Unlike traditional IRAs or 401(k)s, Roth IRAs do not have required minimum distributions (RMDs) during the account holder’s lifetime. This means you can allow your investments to grow tax-free for as long as you wish without being forced to withdraw a specific amount each year.

7. Estate Planning Benefits
Roth IRAs can offer significant estate planning advantages. Upon the account holder’s death, Roth IRAs can be passed on to beneficiaries, who can enjoy tax-free distributions, subject to certain rules. This allows for the preservation and growth of wealth for future generations.

In conclusion, a Roth IRA can be an excellent retirement savings tool for individuals looking for tax-free withdrawals and flexibility. By understanding the contribution limits, tax advantages, investment options, withdrawal rules, and estate planning benefits, you’ll be equipped to make informed decisions about saving for retirement. Remember to consult with a financial advisor to tailor your Roth IRA strategy to your specific needs and goals. Start saving early, increase contributions over time, and enjoy the tax-free growth that Roth IRAs have to offer.