A Roth individual retirement account is a retirement planning option that was established in 1997 to provide additional options for those wishing to invest for retirement. Roth IRAs differ from traditional IRAs in the tax benefits that each offers. When you invest in a Roth IRA, you make after-tax contributions (meaning you receive no tax benefits in the year of contribution), but Roth IRA growth and earnings are tax-free upon withdrawal, assuming certain conditions are met.
Benefits of Roth IRAs
There are a number of benefits to investing in Roth individual retirement accounts. These are:
- Tax-free growth – Since Roth IRA contributions are made with after-tax income, any potential growth that accrues during the investment period is not subject to additional income tax.
- Tax-free withdrawals – Distributions from Roth IRAs are tax-free, assuming that certain criteria are met. Accounts must be open for a minimum of five years and withdrawals must occur after age 59 ½ (or after death, disability or for a qualified first time home purchase) in order for this benefit to take effect.
- No required minimum distributions – Roth IRA owners are not required to make withdrawals at a certain age, and any assets that remain in the account upon death can be transferred to heirs.
- Fewer withdrawal restrictions than traditional IRAs – Direct contributions can be withdrawn at any time (tax-free); earnings can be withdrawn tax-free when conditions of tax-free withdrawals (see above) are met.
- Multiple retirement plans – After-tax contributions can be made to a Roth IRA even if the owner is covered by another qualified retirement plan (such as an employer-sponsored 401(k)).
Roth IRA Contribution Limits
Roth individual retirement account contribution limits are currently $5,500 annually (or up to 100% of earned income, if lower) or $6,500 annually for those over 50 years of age (this is referred to as a “catch-up contribution”). Contributions are made after-taxes and offer no tax benefits in the year of contribution. However, growth and earnings accrue tax-free, assuming certain conditions are met. There are income restrictions related to eligibility to receive tax benefits of Roth IRAs (either full or partial). There are no Roth IRA contribution minimums, although some plans require a minimum to initially open a Roth IRA account.
Roth IRA Rules
In addition to rules for Roth individual retirement accounts related to contribution limits, a few other rules apply to this type of retirement planning option. These include:
- Must have employment compensation in order to be eligible for Roth IRA benefits.
- After-tax contributions to Roth IRAs can be made up to $5,500 annually, or up to $6,500 annually if over age 50. There are income limits for those wishing to contribute to Roth IRAs.
- Withdrawals from Roth IRAs cannot be made without penalty before age 59 ½ (unless specific conditions are met, such as death, disability or a qualified first home purchase), but there are no required minimum distributions during the lifetime of the account owner.
- A 10% penalty will be administered for withdrawals that occur prior to age 59 ½ that don’t meet eligibility criteria, in addition to taxation of earnings on withdrawal amounts.
- Investors must be 18 years old to open a Roth individual retirement account.
Open a Roth IRA
If you would like more information about opening a Roth individual retirement account, contact one of the experienced retirement planning specialists at Alamo Capital. We can help you create a long-term plan to meet your retirement goals and can advise you on how Roth IRAs can fit into your overall retirement planning portfolio.
For more information about Roth IRAs or to open a Roth individual retirement account, please either call our office at (877) 68-ALAMO – or – (877) 682-5266, fill out or brief contact form or email our office at [email protected].