What Is a Roth IRA?

Roth IRAs are a great tool for younger employees or employees at lower income levels to invest in retirement with tax savings, lack of required minimum distributions (RMDs), and flexible timelines for contributions. The choice to open and fund either a Roth IRA or Traditional IRA requires careful financial planning.

A Roth IRA is a specific form of individual retirement account that lets you invest your after-tax dollars and receive monthly tax-free distributions during your retirement.?It is an option for high earners that want to invest in retirement without having to convert funds into a traditional or Roth 401(k).

How Does a Roth IRA Work?

Roth IRAs are simple to open and set up and funding the account is just as painless. Typically, you will be given a list of risk-aversion questions to determine which ETF/fund would be the best place to invest your contributions. Your after-tax funds are then invested in the plan you choose.?

You can choose to fund your account monthly through automated deductions from your bank account. You may also elect to assign a beneficiary for your account’s funds in case of death.

How To Open a Roth IRA

You may have researched how to open a Roth IRA recently. The truth is, opening a Roth IRA is quite simple. Your investment advisor can help you open an account and fund it typically in a few days. There are also online options available for you to open an account and begin investing quickly. It’s important to read all prospectus information on funds you plan to invest in with your Roth IRA.?

How Distributions Are Handled During Retirement

Once you retire, you will then receive distributions according to a pre-defined schedule. In the event of your death, your beneficiary will receive distributions or a lump sum as stated in your will.?

Roth IRA vs. Traditional IRA

If you were wondering how to open a Roth IRA, you might also be wondering about the differences between Roth IRAs and Traditional IRAs. There are several differences between Roth and Traditional IRAs that you should know before choosing which retirement account. Many of the differences between these two plans involve income limits and deductibility of contributions.?

Contribution Limits

Roth IRA

$6,000 (total amount of all retirement account contributions)

$7,000 (if you are age 50 or older)

Traditional IRA

$6,000 (total amount of all retirement account contributions)

$7,000 (if you are age 50 or older)

Income Phaseout Limits (Differ based on filing status)

Roth IRA

Single: >?$144,000

Married: >?$214,000

Traditional IRA

There are no income limits for Traditional IRAs. However, income limits exist for contributions to be deductible.

Features/Benefits

Roth IRA - All contributions must be made using after-tax funds. Contributions are non-deductible if you are investing using a Roth IRA.?

Traditional IRA - Contributions may be made with pre-taxed funds. You may deduct contributions to a Traditional IRA.?

Source: IRS Tax Tip 2021-170, November 17, 2021

Pros of a Roth IRA

There are a few important benefits to saving for retirement with a Roth IRA that you should keep in mind.?

Tax-Free Growth

A Roth IRA offers a major benefit that can help you grow your savings and allow you peace of mind during your retirement. Because you’ll be investing your after-tax dollars throughout your working years, you have the benefit of having a stable tax-free income during retirement. What’s even better is the earnings you’ve accumulated are also exempt from being taxed.?

No Required Minimum Distributions

There are no required minimum distributions once you retire so you are free to allow your savings to continue to grow as long as you’d like.?

Flexible Timing

A Roth IRA gives you the ability to time your contributions without being tied down to a specific schedule of contributions throughout the year. Whether you choose monthly, quarterly or one lump sum contribution at the end of the year, this type of retirement account is controlled entirely by you. The flexible timing offered by a Roth IRA is particularly useful to those who may receive large bonuses at the end of the year or have a set schedule in mind for their contributions that differs from the standard bi-weekly contribution.?

Cons of a Roth IRA?

While there are major upsides to saving for retirement using a Roth IRA, there are also a few negatives that you and your family should know.???

Taxpaying Upfront

In contrast to other retirement investment vehicles, a Roth IRA requires you to pay taxes up front.?

Low Maximum Contribution

Roth IRAs have a relatively low yearly maximum contribution amount which may inhibit the growth of your investment over time compared to comparable retirement accounts.?

Income Limits

To qualify for a Roth IRA account, you must not make above $124,000 if you are single and head of household. If you are married and file jointly, the income limit is $214,000.?

Is a Roth IRA Right for You?

Most expert advice points to younger employees taking advantage of Roth IRAs due to their potentially lower tax brackets but it is important to keep in mind that any retirement account and savings plan is better than none at all.?

Top Takeaways

Opening a Roth IRA is simple and nearly all investment companies offer them.

• Roth IRAs provide tax-free income distributions during your retirement years.
• Income limits prevent high-earning individuals from being able to open a Roth IRA.
• An employee’s Roth IRA contributions are limited to a set amount each year.
• A financial advisor can help you determine whether a Roth or Traditional IRA is better for you.

(Reporting by NPD, Editing by Mariah Flores)