As you get older, you (hopefully) start to think more about your financial stability, retirement, savings, etc. Chances are, you’ve heard the term Roth IRA. You may understand that it’s important, but what exactly is it? Do you need one? How do you get one?
Let’s start at the beginning.
What Exactly is a Roth IRA?
In case you didn’t know, IRA stands for individual retirement account. There are a number of IRAs available, each with different requirements, advantages, limitations, etc. Roth IRAs are one of the most popular, especially among the middle class, due to a few distinctions.
One of the biggest selling points for Roth IRAs is that they aren’t taxed on growth. Whatever interest you gain over the years, is yours to keep. This makes it easier to plan for retirement, since you can calculate your earnings without trying to estimate future tax rates.
As for the money you put into the Roth IRA, you pay taxes on that upfront like you would with any other money. Other options may provide you with tax breaks up front, only to take those taxes out later on from the larger amount you’ve saved up.
With a Roth IRA, you can also pull your money out early without penalties as long as it doesn’t include earnings you’ve made. Earnings are taxed if they’re removed early, with a few exceptions which we’ll talk about in a moment.
Ultimately, Roth IRAs are one of the most flexible retirement plans available, acting as both a retirement savings account and an emergency backup fund.
Should You Get a Roth IRA?
There are eligibility limitations to a Roth IRA. If you are single or the head of a household, you must earn less than $122,000 a year to fully contribute. If you’re married and filing jointly, you must earn less than $193,000.
Those under the age of 50 who are fully eligible can contribute up to $6000 a year. Once you’re over 50, you can contribute an additional $1000 as a catch-up contribution.
If you haven’t bought a home before, a Roth IRA can be a great tool for saving some money.
You can pull out as much as $10,000 of earnings when buying your first home without paying penalties or taxes, as long as your account has been opened for 5 years.
A Roth IRA can also be great for providing an inheritance, since the same tax rules apply to the inheritor as they do to you.
Unless you make too much money, or your current tax rates are higher than they will be when you retire, it’s definitely worth considering a Roth IRA.
Knowing Your Full Options
The best way to plan for retirement, including setting up retirement accounts like a Roth IRA, is with a financial professional at your side. Our team at KB&P is well versed with guiding people of all income levels through retirement.
If you’re ready to get serious about your financial future, don’t put it off another day. Connect with a local CFP in Springfield Ohio now.