Allow me to be your Dad for a minute and tell you that if you haven’t setup a Roth IRA yet, then what are you doing?!
Seriously, if you’re trying to figure out what to do differently with your money this year, how about putting in something that will grow tax free! Whether you know much about investing or money, read on as I explain all the essential Roth IRA basics and what you need to know to make the most of them.
The Essential Roth IRA Basics:
How Much You Can Contribute:
To start out, an IRA (Individual Retirement Arrangement) is a special type of U.S. investment account that is intended to help you save for retirement by giving you a break on your taxes. Unlike a 401k, you setup this account yourself outside of your employer.
Although there are several types of IRA’s, the two most common ones that people invest in are Traditional and Roth IRA’s. The main difference is as follows:
Higher Earnings Potential with the Roth IRA:
Although they sound similar on the surface, one of the basics of a Roth IRA that people don’t realize is that you can actually potentially earn more with the Roth option. This is because of the way that the taxes work. It leads to what’s called a higher effective contribution rate. To see a detailed example of how this works, read my previous post Traditional vs. Roth IRA – Part 3: Why I Prefer a Roth IRA.
How Much Can I Invest?
No matter which IRA you choose, the maximum allowable contribution (as of 2013) is $5,500. Therefore, a couple can setup two for a maximum of $11,000.
What Can I Invest In?
Your Roth IRA can be any number of investments from safe to risky:
• Mutual funds
• Real estate
Usually whenever you open any of these accounts, you can request that they be designated as a Roth IRA.
For help on getting started, read my previous posts:
Are There Any Requirements for Contributing?
In addition to simply needing to have earned income, one of the big Roth IRA fundamentals is that your ability to contribute may be limited depending on how much money you make. It all depends on your Modified Adjusted Gross Income (MAGI) reported on your tax documents.
Here are the Roth IRA income limits:
Other Things to Know About Roth IRA’s:
• If you absolutely need your money back, you can take an early withdraw from Roth IRA contributions (the money you put in, not the earnings) after 5 years under certain conditions.
• You can’t convert a Roth IRA to a Traditional IRA. But you can convert a Traditional IRA to a Roth.
• You don’t have to take required minimum distributions at age 70-1/2 like you do with a Traditional IRA, 401k, and other retirement accounts.
• If you die, you can will a Roth IRA to an heir without tax implications or penalty.
Readers – What are some of the characteristics about Roth IRA’s that you find more attractive over other types of retirement accounts?
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