Roth IRA – Tax Free Earnings

Roth IRA – Tax Free Earnings

With a tax free Roth IRA, you get a bonus when you retire, whereby, every dollar you withdraw stays in your pocket, and Uncle Sam gets $0.

This type of individual retirement account provides tax-free growth and tax-free withdrawals in retirement. The rules stipulate that as long as you’ve maintained your account for 5 years, and you’re age 59½ or older, you can withdraw your money at your leisure and it’s tax free.

Here’s some other advantages:

No age limit

Provided you have earned income that qualifies, you can put money in the account for as many years as needed.

No RMDs

There are no required minimum distributions (RMDs) as long as you live.

Employer-plan restrictions

Even if you’re covered by an employer-plan, such as a 401(k), you can still contribute the maximum annual amount to your Roth, provided you don’t surpass the IRS’s income limits.

No tax for your beneficiaries

You can pass your Roth on to your beneficiaries, and their withdrawals will be tax-free.

Other details:

Nondeductible contributions

Roth contributions are not tax-deductible.

Income restrictions

Modified adjusted gross income (MAGI) must be less than the IRS’s specified annual limit.

Income level for a Roth IRA

If your income is too high for a Roth IRA, you have the option of using a “back door” Roth conversion.

This is done by placing your contribution in a traditional IRA (which has no income limits); then, moving the money to a Roth using a “Roth conversion.” However, because a Roth conversion is not reversible,  make sure you allocate for the tax consequences.

Resources: IRS definitions and explanations