A Roth IRA (individual retirement account) is one of the most exciting retirement-planning opportunities available. Tax-free growth is a Roth IRA's most important benefit.
Who Should Open a Roth IRA?
With opportunities for tax-advantaged growth limited, a Roth IRA is a great way to become financially independent by retirement.
How and Where to Open a Roth IRA
You can open a Roth IRA at nearly any bank or brokerage house, either in-person or online. Opening a Roth IRA is a very simple process, typically with help readily available.
Often, there are just a few forms to complete. Just have your Social Security number handy as well as the Social Security numbers and addresses of any potential beneficiaries.
The amount you are permitted to contribute to a Roth IRA is limited to your earned income. Earned income includes wages and self-employment earnings but does not include interest or dividends.
If you are married, your combined contribution limit is restricted to the total of your combined earned income.
For the 2019 and 2020 tax years, the most you can contribute in a year to a Roth IRA is $6,000, or $7,000 if you're 50 or older. If you have earned income, you can contribute to both a traditional IRA and a Roth IRA, but the combination cannot exceed the above figures.
Each Roth IRA contribution relates to a specific calendar year. You can make a contribution from January 1 of that year until the filing deadline of your tax return. Those who wish to make a 2019 Roth IRA contribution can do so from Jan. 1, 2019, until July 15, 2020—the deadline was extended from the usual April 15 in 2020.
You don't have to make the entire $6,000 contribution at once—you can make many smaller contributions, as long as the total contributed does not exceed $6,000.
Eligible for Retirement Savers Tax Credit
While income tax deductions are not possible for Roth contributions, some taxpayers are eligible for the Retirement Savers Credit based on their adjusted gross income. This is an added incentive the tax code provides for low and middle-income taxpayers to increase their retirement savings and reduce taxes along the way.
The money you contribute to your Roth IRA grows tax-free. You do not have to pay any taxes on the earnings in the account. In fact, you do not even report the income to the IRS.
Even in retirement, when you ideally first access your Roth IRA money, you do not owe taxes on the distribution. If you take your Roth IRA money prior to retirement, however, taxes may be due.
Eligibility to contribute to a Roth IRA is restricted by your filing status and modified adjusted gross income (MAGI).
The Roth IRA income limitations change each year. For the 2019 tax year, single filers can make maximum Roth IRA contributions when MAGI is less than $124,000, and they can contribute a reduced amount if MAGI is less than $139,000. If you are married filing jointly, you can max out contributions when MAGI is less than $199,000, and you can make reduced contributions if your MAGI is less than $206,000.
No Required Distributions
Unlike 401(k) plans and traditional IRAs, there is no age at which you must begin to distribute money from your Roth IRA. As a result, Roth IRAs are an excellent tool to pass along wealth to your children or grandchildren.