Chances are you’ve heard of someone talk about Roth IRAs. You may even have one yourself! Here is a quick rundown of why it may be a good investment tool, the flexibility of them, and limitations!
To be eligible for a Roth IRA, you must have earned income. Even if you are a minor, you may open a Roth, as long as you are earning money. Unfortunately, the IRS sees a Roth IRA as such a useful tool, they put a cap on the amount of money you can make before they no longer allow people to contribute anymore. For 2023, the annual contribution limits are as follows:
Single - $138,000
Married Filing Jointly - $218,000
As long as you are under those income limits, you may contribute $6,500 into your Roth IRA, annually. If you are 50 years or older, you can contribute an additional $1,000 (for a total of $7,500).
The largest benefit, and one that you are probably familiar with is the fact that when you take money out of your Roth IRA, you don’t need to pay any taxes on it. The money that is contributed to a Roth has already been taxed. It grows tax deferred and is not taxable when it is taken out.
Just like a traditional IRA, you need to wait until you are 59 ½ before you can take money out of your Roth IRA. When it comes to a traditional IRA, the IRS makes you take distributions at the age of 73, whether you want to or not. A Roth IRA doesn’t have that stipulation. If you decide to never take any money out of your Roth, you do not have to. It will then pass onto your beneficiaries on a tax-free basis (Your kids will thank you later).
Although it is not the purpose of a Roth, if things get tight, you do have the ability to access funds in your Roth in certain circumstances.
-You always have access to any contributions that you made to the Roth. If I contributed $20,000 and the value of the Roth is $27,000, you can access $20,000 without penalty.
-You can pull out up to $10,000 of your Roth for the first-time purchase of a home.
-If you become disabled, you can access the funds in your Roth without penalty as well.
The last benefit that is rarely talked about is that fact that when you do start taking distributions from your Roth, it does not count as income. Why does that matter?
Many people decide to retire before they are eligible for Medicare. This puts them in a situation where they need to purchase health care on the open market. Depending on what your adjusted gross income is, determines the amount of tax credits you will get on your health care. If you take money out of your traditional IRA or 401k, this will count as income. However, anything you pull out of your Roth, will not. You could theoretically have your adjusted gross income equal $65,000, pull another $30,000 out of your Roth IRA, for a total of $95,000, but still get ample tax credits on your health care premiums because your adjusted gross income will still be $65,000.
Although it may not be a fit for everyone, there are numerous benefits to having a Roth IRA. Your future self will look back and be grateful that your 2023 self was contributing to a Roth IRA!