Retirement 101: Roth IRAs

by Ron Haynes

Roth IRAs are one of the greatest wealth vehicles that has been made available to the average person in decades. By using after tax dollars to make your contributions, your growth and earnings are not taxed when you withdraw them after age 59 1/2!

Roth IRAs are similar to traditional IRAs, but with three major differences:

  • All Roth IRA contributions are made with after-tax dollars.
  • Investments in Roth IRAs grow tax-free and are not subject to tax upon withdrawal.
  • Since Roth IRA contributions are made with after-tax dollars, they don’t qualify for tax deductions.

Roth and Traditional IRAs differ in a few other significant, but more complex, ways. The following table breaks down all the important traits of Roth IRAs, including all the specific features that distinguish Roths from Traditional IRAs.

Key Traits of Roth IRAs

Tax benefits

You never have to pay taxes on any investment gains or withdrawals if:

  • Your account has been open for at least five years
  • You withdraw at age 59 1/2 or later
  • You use the money to purchase your first home
  • You become disabled or die

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Eligibility

Plan participants can be any age. Singles with earned income below $110,000 ($173,000 for married joint filers) can make the full contribution plus the “catch-up” contribution, if applicable. Contribution limits decrease for singles with $110,000–125,000 of earned income ($173,000–$183,000 for married joint filers). Singles or couples with income above these ranges can’t contribute to a Roth IRA.

Vesting

All contributions vest immediately.

Enrollment deadlines

A Roth IRA for a given year must be set up by April 15 of the next year.

Contribution deadlines

All contributions to an IRA for a given year must be made by April 15 of the next year.

Contribution limits

Up to $5,000 per year or, if you’re age 50 or older, up to $6,000.

Contribution sources

Earned income (salary, commissions, other work-related sources, alimony).

Withdrawal penalties

Since Roth contributions are made with after-tax dollars and don’t qualify for tax deductions, no penalty applies to early withdrawals equal to the amount of your original contributions. Any gains realized by early withdrawals are subject to income tax and a 10% penalty, however.

Transfers

Most plans can be transferred to other Roth (after-tax) retirement plans.

Borrowing

Loans from Roth IRA accounts are not permitted.

Beneficiaries

You can designate primary and contingent beneficiaries. Roth IRAs are the only IRAs that can be passed on income tax–free to beneficiaries.

Required minimum distributions

Roth IRAs have no required minimum distributions.

Fees and minimums

Annual fees range from $0–50. Minimums range from $0–25, depending on the plan provider. However, Scottrade has no fee IRAs and you can easily use them to purchase commission free exchange traded funds.

 

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 1 comment }

Dan - BankVibe

Roth income limits for making contributions are now between $110,000 and $125,000 for singles and heads of households this year – that’s up $3,000 from 2011.

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