Opening a retirement savings account is one of the most popular retirement planning strategies. The individual retirement account (IRA) is an account in which you contribute after-tax dollars. A Roth IRA is similar to a regular IRA but with different tax advantages. Your account must be active for at least five years to enjoy the tax-free benefits. Below is a comprehensive beginner’s guide to Roth IRAs to help you get started.
How Does Roth IRA Work?
Unlike a traditional IRA, which holds pre-tax savings, with a Roth IRA, you deposit your after-tax dollars. After-tax dollars are funds you pay into a retirement or investment account after all income taxes have been deducted. Once the money is in your Roth account, you choose the investment you want to make. With a Roth IRA, the interest you gain on your contributions grows tax-free, and you can withdraw your funds tax-free after retirement. One of the main advantages of a Roth account is that you have already paid taxes on your money before saving it in the Roth IRA, so you can enjoy your tax-free interest whenever you want as long as you are age 59 ½ or above.
You can fund your Roth IRA from various sources, such as:
- Regular contributions
- Rollover contributions
- Spousal IRA contributions
All your contributions to your Roth account must be made through cash you have on hand, including money orders and checks. Payment through securities and properties is not acceptable. If you have assets that you want to use to make your payments, you must liquefy them first.
Income Limits for Roth Accounts
You have to meet income limits to qualify for a Roth IRA, and there is also a limit on how much you can contribute to your Roth IRA. The Internal Revenue Service (IRS) changes these limits from time to time.
As of 2021, if you are single, you cannot contribute to a Roth IRA if you earn more than $140,000 per year. In 2022 and 2023, the income range for single filers is $129,000 and $138,000, respectively. The maximum annual contribution is $6,000 in 2022 and $6,500 in 2023. However, the annual contribution will be higher if you are 50 years and older.
For a spouse filing in a joint account or a qualifying widow or widower, your income limit is $204 000 in 2022 and $218,000 in 2023. The maximum annual contribution is $6,000 in 2022 and $6,500 in 2023. Like single filers, if you are 50 years or older, the maximum annual contribution goes up by about $1,000.
If you do not qualify for a Roth IRA because you exceed the income limit, you may still be able to contribute to a Roth account via a workaround called Roth conversion. Roth conversion allows you to transfer your savings from your regular IRA to a Roth IRA. The only disadvantage with Roth conversion is that you must pay taxes for your savings before transferring them. Roth conversion has no income restrictions or marital status requirements. Anyone of legal age who is earning is eligible for Roth conversion.
Start Saving for the Future
A retirement plan is one of the best ways to protect your future and ensure that you will have a financially stable life after retirement. Even if you already have a regular individual retirement account, it may still be beneficial to consider a Roth IRA. The best way to determine your ideal retirement planning strategy is to speak to a trusted financial professional. Visit the IRS website or reach out to a financial professional to learn more about retirement account options and requirements.