What is a Roth IRA?
A Roth IRA is an individual retirement account that holds investments. The Roth was created in 1997 to help middle class Americans prepare and save for their retirement years. The Roth IRA was announced as part of the Taxpayer Relief Act, and is named for the late Senator William Roth of Delaware. This IRA is not tax-deductible, but offers much greater flexibility than a Traditional IRA.
There are qualifying rules regarding income to qualify for the Roth IRA: for single filers, a modified gross income not to exceed $120,000 and for married filing jointly not to be more than $167,000. Contribution limits are set at a yearly $5000 cap, with a “catch-up” allowance of an additional $1000 for persons over the age of 50 years old.
After a Roth IRA is in existence for a period of five years, both the contributions and the profits in the account can be withdrawn free from taxation or penalty. What is a Roth IRA? It is the form of account that houses investments, not the actual investments within. If the Roth IRA is self-directed, the account owner has increased investment opportunities beyond the traditional stocks, bonds, and mutual funds, and could decide on other tangible investment assets including precious metals and real estate. Remember, with a Roth IRA contributions are made with after-tax money , so the transactions within the IRA have no tax impact and withdrawals are made tax-free.
The account owner can begin taking withdrawals at age 59 ½ years old, provided the account has seasoned for five years, but unlike other IRA’s, the Roth IRA does not require distributions to begin by age 70 ½ years old. This flexibility lets individuals who do not need the withdrawals for retirement to continue funding the account and growing earnings in the Roth’s tax-free environment. Many investors decide to continue funding the Roth IRA and leave it as a legacy for their heirs.
Assuming that tax rates could increase in the coming years, investing in a Roth and paying taxes on contributions now could be an advantage, anticipating a higher tax rate at retirement age when distributions begin. What is a Roth IRA? It’s a smart program used to prepare for retirement.