Basics Explained: Roth IRA

How does a tax-free growth of your savings over time sound? Now imagine yourself retiring at a certain age to reap the compounded benefits of those savings having to pay virtually nothing to anyone but yourself – like a paycheck!

What’s the big deal?

A Roth IRA (individual retirement account) is one of the most exciting retirement planning opportunities currently available from which you can start withdrawing after you turn 59.5 years of age. A Roth IRA’s biggest selling point and an important one at that is the Tax-free growth aspect to it. It makes sense to invest in a Roth IRA if you:

• aren’t eligible to receive a 401(k) employer matching contribution
• can save more now for retirement than the employer match

How do I open a Roth IRA?

The great news is that a Roth IRA can be opened at almost any bank or brokerage house. My advice – walk in and speak to an available financial adviser/banker and they will guide you through the whole process (which really is very easy). Except the paperwork that you have to fill out, you will be required to provide a valid Social Security Number (SSN) – you CANNOT make an IRA without an SSN.

How much can I contribute to a Roth IRA?

You can only contribute part of your earned income to a Roth IRA and that mainly includes wages and self-employment earnings and not interest or dividends. The annual limit for the most you can contribute towards each individual account is $6000 as of 2019.

What are the deadlines I should adhere to?

Roth IRA contribution follow the calendar year which means that you can make contributions from January 1 of a given year until the tax return filing deadline. For example:

In order to contribute to your 2017 Roth IRA, you could’ve started from 1 January 2017 till the tax-filing deadline (which was 15 April 2018). Contributions can be made in small installments or lump-sum as long as the total does not exceed the limit set by the IRS.

What are the penalties I should be aware of?

Once you turn 59.5 years old, you can withdraw any amount from your IRA without having to pay the 10 percent penalty. There are penalties (in some cases can be waived) on early withdrawal of funds from the IRA. I will cover this in-depth in future articles.

What are the taxes I pay on my Roth IRA?

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 over its lifetime. 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.

This article covered only the basics of Roth IRAs. We will dive into more detail as time progresses so stay tuned! You may also check out our article on why to create Emergency Funds and how they can protect you when times get rough.