Roth IRA Basics: Why Should You Open One?

Roth IRA Basics: Why Should You Open One?

March 22, 2020
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Roth IRA Basics: Why Should You Open One?

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If you're working on your retirement planning, you might consider IRAs alongside 401(k) accounts.

Do you have a retirement account? If not, you're not alone. 48% of Americans over the age of 55 have nothing saved for retirement. While it's an improvement from a decade ago, it still isn't great.

If you don't have anything saved, there's no time better than the present to get started. One option to get started is to open a Roth IRA account.

Take some time to learn the Roth IRA basics and get started saving.

The Roth IRA Basics

A Roth IRA is a type of retirement account. It's different from other types of retirement accounts because you fund it with money you've already paid taxes on. That means you won't pay taxes on your withdrawals when you're retired.

Why Open a Roth IRA?

The main reason to open a Roth IRA is to take advantage of the low taxes most Americans are paying now. You'll save money in the long run by paying the lower tax rate now and avoiding the higher tax rate you are likely to be subjected to during retirement.

In addition, Roth IRA accounts are not subjected to the Required Minimum Distributions that most retirement accounts are.

They also won't count as provisional income, which can increase how much of your Social Security will be subject to income tax.

Limits of a Roth IRA

The surest sign that any retirement plan is good is when the government limits participation, and this is the case with the Roth IRA.

Because the prospect of saving on tax dollars is so enticing, there are limits on who can open one and how much money can be contributed each year.

If you are single, you can't contribute to a Roth IRA if you make more than $124,000 per year. If you're married, the limit is $196,000. These limits can change each year, so it's best to check for the latest restrictions.

There's also an option to convert a traditional IRA into a Roth IRA for those who don't qualify due to income.

If you do qualify for a Roth IRA, you can contribute up to $6,000 per year. If you're over 50, you can contribute a bit more, $7,000.

How to Open a Roth IRA

Almost all brokerage services and the majority of banking institutions offer a Roth IRA solution. Some examples include Vanguard, Fidelity, and ETrade.

If you have an existing account with any of those companies, opening an account with the same company is the easiest way to go. If not, research some options before you choose the company you want to open your account with, then fund the account with money.

The easiest thing to do is set up automatic contributions – this makes saving money easy.

Withdrawal Limitations

If you withdraw your money too soon, then you could be subject to penalties and taxes. There's a five-year rule and age limit to determine eligibility. While you can contribute your direct contributions tax-free at any time, there's a five year limit for specific situations.

  • The earnings of your account
  • You've converted your traditional IRA to Roth IRA
  • You've inherited your Roth IRA

The advantages of a Roth IRA are considerable, but if you decide to withdraw these funds before the five-year stipulation, then you'll have to pay income taxes and a 10% penalty on the total amount withdrawn.

Open Your Roth IRA Today

Now that you know the Roth IRA basics, you're ready to start saving for your retirement. Putting money away after you pay tax means that you'll save money in the future by not having to pay taxes on its growth or your withdrawals.

Check out the retirement section of our blog for more helpful tips on saving for your future.