Roth IRAs allow individuals to invest in a variety of assets. You can open one through any number of custodians such as banks or brokerage firms and then begin saving by contributing or transferring money into it.
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Know Your Options When Saving for RetirementIt is essential that you know all your options when saving for retirement, and Thrivent financial advisors can assist in understanding what makes a Roth IRA different and how it could fit with existing accounts.
Contributions are tax-free
Roth IRAs are individual retirement accounts that allow you to withdraw contributions tax- and penalty-free, unlike traditional IRAs which allow withdrawal of earnings after tax and sometimes come with an early withdrawal penalty of 10%. To qualify for a Roth IRA, your earned income must fulfill certain criteria, such as salaries, hourly wages, bonuses commissions or self-employed income – Social Security benefits retirement distributions and unemployment compensation do not count towards eligibility criteria.
Roth IRAs allow you to withdraw your earnings tax-free after age 59 1/2 (subject to certain exceptions). Roth IRA withdrawals are tax free after age 591/2 (subjected to exceptions). This is unlike traditional IRAs and 401(k), which require that you pay taxes if you withdraw funds before this age.
There are no required minimum distributions
Roth IRAs do not have required minimum distributions (RMDs), allowing investment earnings to accrue tax-free. This is a significant benefit for people who expect to be in lower income brackets during retirement. You can withdraw the principal of your Roth IRA without any taxes or penalties. However, withdrawals made before age 59 1/2 may trigger income tax and a 10% fee (unless an exception applies).
Traditional IRAs require RMDs beginning at age 72 or 70 1/2 depending on your year of birth, with withdrawal amounts determined annually using a life expectancy table from the IRS. If you miss your RMD, there may be penalties up to 25% of its amount that must be paid, in addition to regular income taxes on this missed distribution – making this another compelling reason to consult both tax and legal advisors before making investment decisions.
Your earnings can be withdrawn tax-free at any time
Roth IRA contributions are withdrawn anytime, but it is best to wait until retirement. Withdrawals made before the age of 59 1/2 are subject to taxes and a 10% early withdrawal penalty. However, this penalty can be waived in certain circumstances.
Assuming you meet the five-year rule and are over age 59, withdrawing investment earnings without penalty at any age is possible without incurring penalties; however, you will have to pay income taxes on them.
Contributing to a Roth IRA is based on your modified-adjusted gross income (MAGI), a figure that includes all deductions, credits and qualifying income taxes. Contributors with MAGIs below $138,000 for single filers or $228k if filing jointly may make tax-free contributions – also, “taxable compensation” must have been received during this year in order to qualify.
No income cap
Roth IRAs do not have an income limit, but the contribution limits are based on your filing status and gross adjusted income. This is to ensure fairness for all workers and prevent those with high incomes from benefiting more than others. This differs from 401(k) rules which use nondiscrimination tests to establish eligibility for contributions.
Roth IRA contributions can only be made using earned income such as salary, hourly wages, tips or commissions earned directly by you as salary, hourly wages or tips or commissions received directly. Investment income such as dividends or interest or Social Security benefits do not count towards earned income and cannot be contributed using Roth IRAs.
Roth IRA contributions may change annually; currently the limit for those under 50 is $6,500 annually with an additional $1,000 of “catch-up” contributions allowed if you exceed this limit. If you exceed it, however, the IRS will impose a 6% penalty on any excess contributions and earnings remaining in your account – to avoid this fee, withdraw these items within six months of filing your tax return due date or submit an amended return relating to prior year contributions and earnings.
