There was once a time when retirement was simply walking away from a job after years of service and drawing a check from the Social Security Administration and a work-based pension. These days, 401ks, IRAs, Social Security and other programs are all available for people trying to save for retirement. When putting together a retirement package for yourself, consider adding a variety of different savings options to maximize your retirement benefits. One product you should consider is a Roth IRA.
What Is A Roth IRA?
A Roth IRA differs from a traditional IRA because you pay taxes on your contributions as you make them. However, unlike the traditional model, all withdrawals from a Roth IRA are tax and penalty free. Roth IRAs are also free from government money, meaning that everything in the account belongs to you or even your heirs if you decide to pass it on to them after you are gone.
The real beauty of the Roth IRA is that it is perfect for people who expect to increase their income (and their tax bracket) as they age. Because you are taxed at the time you put the money in, you don’t have to worry about paying higher taxes later on in life when you actually need the money.
Who Is Eligible?
If you are single and make less than $116,000 per year, you are eligible to have a Roth IRA. You can put in a maximum of $5500 per year. If you are married, the upper income limit becomes $183,000 if you file jointly.
Outside of the tax-free benefit, there is no withdrawal penalty for anyone as long as you hold the account for 5 years and be at least 59 and a half years old. However, if you have a disability or an untimely death you or your loved ones can pull the money out immediately. You can also pull up to $10,000 for first time home buying. You can also pull money out for higher education costs without a penalty, but you will be subject to income taxes.
Once you hit retirement age, you are never required to make mandatory withdrawals. Traditional IRAs usually require you to begin withdrawing after age 70. However, with a Roth, you can hold onto the money in the account as long as you want and even pass it on to your heirs.
Finally, if you are over the age of 70 and are still working, you can still contribute to your Roth IRA, unlike the traditional model.
There are a few downsides to a Roth IRA. For instance, contributions are not tax deductible. Also, if you expect to make more money during your Roth IRA contributions than when you are retiring, you will end up paying more in taxes in the long run. Finally, the amount you can contribute annually is fairly low, so it should not be your only source of retirement savings.
Overall, if you are planning to retire with a sizeable income and are making modest money currently, a Roth IRA is the perfect supplement to your other retirement accounts.