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Roth IRAs

Unlike a traditional IRA, a Roth IRA doesn't offer an immediate tax benefit. You're investing with after-tax dollars.

But the Roth offers multiple benefits down the road:


  1. You can withdraw your contributions at any time without a tax penalty. So a Roth IRA can double as an emergency savings account.

  2. If your investment grows, you can withdraw the earnings tax-free provided you're at least 59 1/2 and have held a Roth for five years.

    Let's say you build your Roth IRA to $100,000, and taxes at the time of your retirement are 30 percent between the federal and state governments. You would have to accumulate almost $143,000 in a 401(k) to end up with as much money after taxes as that $100,000 in your Roth IRA.

  3. When you retire, you don't have to withdraw Roth IRA money if you don't need it. With a traditional IRA, you must withdraw a certain share of the money every year after you turn 72.


WHO IS ELIGIBLE

You can contribute if you or your spouse earned income this year and as long as your earned income doesn't exceed certain limits. In 2020, for instance, married couples filing taxes jointly cannot contribute if their modified adjusted gross income is $203,000 or higher.

Most other people can contribute up to $6,000 a year -- or $7,000 a year after age 50. Stay-at-home spouses can contribute, too -- a husband and wife can each invest $6,000 if together they have at least $12,000 in earned income.

RESTRICTIONS

Roth IRA earnings can be withdrawn tax-free by investors at least 59 1/2 years old who have had the account at least five years. Earlier withdrawals are tax-free under certain circumstances: the owner has died or become disabled; the money is used to buy a first home; the money is used to cover certain medical expenses or medical insurance premiums; or the money is used for qualified higher education expenses. If those conditions are not met, the account owner must pay ordinary income taxes on withdrawals and also is subject to a 10 percent tax penalty on earnings from contributions to the account. Eligibility to participate depends on adjustable gross income amounts.


Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.