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What is a Roth IRA?

If you want a tax-efficient way to save for your retirement, then ROTH IRA is your solution.

An Overview Of Roth IRA

Roth IRA is a personal retirement account, which allows you to set aside post-tax income up to a particular amount yearly. You won’t be able to subtract your contributions on your income taxes. Once you have performed this, all your withdrawals that observe Roth IRA regulations will be tax-free in the future.

As compared to the traditional IRA, Roth IRA contributions have no up-front tax deduction. When you observe the rules, Roth distributions will be tax-free. You can also tap your contributions anytime without any tax and penalty fees since each penny you set aside in a Roth IRA is your money.

However, the benefit of a Roth IRA may be subjective. It all relies on your tax bracket- both now and when you retire.

You can get the most out of Roth IRAs if you think that you’ll get a higher tax rate during your retirement than your recent rate. So if you’re young and belong to the lower income bracket, then Roth IRAs might be perfect as a savings vehicle. You’ll also take advantage over long years of tax-free, augmented growth.

Roth IRAs are also ideal to those who want to reduce their tax bite in retirement and to older, richer taxpayers who want to inherit their assets tax-free. As compared to traditional IRAs, well-funded retirees can leave their money untouched because Roth IRAs requires no minimum distributions.

Contributions for Roth IRA may start at any age as long as you’re earning income from a job. That makes Roth IRA appropriate for everyone.

Roth IRA Eligibility Requirements

First of all, Roth IRAs imposes an income eligibility limit. So if you have a high income, you’re not eligible for Roth IRA contributions. A person who earns a median household income of around $50,000 is qualified to contribute to Roth IRA.

If your income is very high, you can transform some of your assets in your traditional IRA into Roth IRA. However, you will need to pay taxes on the whole amount you transform.

Depending on your age, income, and tax-filing status, here’s what you can place in a Roth IRA for 2017.

Maximum Contribution

You can make the maximum contribution of $5,500 or $6,500 if you’re above 50 years old to a Roth IRA if you meet the following requirements:

  • Single or single head of a household
  • Has a modified adjusted gross income (MAGI) of not more than $118,000.

You can also make a maximum contribution to a Roth IRA if you’re married filing jointly as long as you have a MAGI of not more than $186,000.

Partial Contribution

As your income increases, your Roth IRA contribution becomes less. This is based on a formula created by the IRS. Here are the relevant income figures:

  • Single with a MAGI of $118,00 – $133,000
  • Married filing jointly with a MAGI of $183,000 – $193,000

If your income surpasses the levels above, then you’re not eligible to make Roth IRA contributions. Special rules apply to married couples that cohabit but file separate tax returns. If their income surpasses $10,00, then they can’t contribute to a Roth IRA.

Roth IRA: Income And Contribution Limit

Single:

If you’re single, your contribution limit is $5,500. If you have a MAGI of less than $118,000.  If they’re 50 years old and above, then you can make an additional contribution of $1,000 per year. You’re ineligible for a direct Roth IRA if you earn more than $133,000.

Married filing separately:

For married filing separately, you’re not eligible for a direct Roth IRA if your MAGI is more than $10,000.

Married filing jointly:

Married couples that file jointly, on the other hand, have a contribution limit of $5,500 if their MAGI is less than $186,00. Again, they can make an additional $1,000 contribution to Roth yearly if they’re more than 50 years old. They become ineligible if their MAGI surpass $196,000.

Be warned though that you can only contribute as much as you earned if your income is less than the maximum contribution limit. For example, if you earn only $4,000, you can contribute only $4,000 to a Roth IRA for the tax year.

A non-working spouse can contribute the maximum Roth IRA amount if his or her working partner has a sufficient income to cover both accounts’ contributions. The household income also shouldn’t surpass the IRS income-eligibility limits.

Advantages Of Roth IRA

Aside from tax rates, other great benefits may let you decide to contribute to a Roth IRA. Here are some of the benefits:

Flexibility

The good thing about Roth IRA is it allows you to withdraw your contributions anytime with no penalty or taxes. However, you should hold the Roth IRA account for at least five years and be at least 59 1/2 years old. You can tap the earnings without any taxes and penalty if the account holder:

  • Dies or becomes disabled
  • Uses up to $10,000 to buy a home for himself/herself or particular family member

You can keep away from the 10% withdrawal penalty if you use the earnings to pay the higher-education fees for yourself or certain family member. Keep in mind that you’ll still incur income taxes.

No Compulsory Withdrawals

Unlike traditional IRAs, which require you to withdraw at age 70 1/2, Roth IRAs doesn’t. This is ideal if you want to grow your account balance for estate planning purposes. Your Roth IRA inheritors will pay no income taxes but they’re obliged to take distributions over their lifetimes.

Saving During Retirement

As long as you remain within the income limits, you can still make Roth contributions if you keep working past your retirement age. Contributions past 70 1/2 years old aren’t allowed in traditional IRAs.

Deadline For Contribution

If you haven’t made your 2017 contributions to Roth IRA yet, don’t worry because the deadline for tax filing is until April 18, 2018.

If you ever wanted to compare it to a 401k plan, you can learn about that here.  There are many questions answered and by reading through that page you should come out with a clear understanding of the similarities and differences.

Tim Schmidt

A Florida-based Entrepreneur, Author, and Life Hacker, Tim Schmidt decided to take control of his retirement portfolio several years ago by setting up a self-directed IRA. This website shares his thoughts and opinions on retirement, investing, and managing credit. You can follow his career and travels on his Official Website as well as on his Instagram page.

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