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The Benefits and Downsides of a Roth IRA

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The Roth IRA is a retirement savings plan that lets you save money for retirement while also paying tax on the income. You can contribute to a Roth IRA in any amount of your choosing, but there are limits on how much you can contribute each year and those limits change as your income changes.

Why should I open a Roth IRA?

The Roth IRA (individual retirement account) is a savings plan that offers many tax benefits, including tax-free income in retirement.

Contributions to a Roth IRA are made with after-tax dollars, but earnings grow tax-free and can be withdrawn tax-free so long as the account has been open for at least five years (and if it's been at least five years since conversion) and there are no other withdrawals during that time period. Any distributions after age 59 ½ or a minimum of 5 years are also tax-free.

Additional benefits of using a Roth include: no required minimum distributions after age 70 ½ because they aren't taxed during your lifetime like traditional IRAs; no required minimum distributions after death because they can be passed on free of estate taxes; and the ability to pass money down during your lifetime without paying inheritance taxes on it as long as you meet certain criteria.

How do I decide whether a Roth IRA is right for me?

To determine if a Roth IRA is right for you, you should consider your current and future marginal tax rate and eligibility for other types of accounts.

The tax benefits make a Roth IRA a good choice for anyone who thinks their tax rate will be higher in retirement than it is today. Taxes on investment gains, withdrawals and conversions can be reduced by investing in a Roth.

What are the Roth IRA's age restrictions?

Although you can open a Roth IRA at any age, it generally makes sense to do so as early in your career as possible. If you're under 18, you’ll need your parent or guardian to open a custodian account and make contributions on your behalf. The amount you can contribute to a Roth IRA depends on your income and age, plus when you begin taking money out of your account.

  • If you are under 50: You can contribute up to $7,000 per year in 2023 (up from $6,500 in 2023).
  • If you are over 50: Your maximum annual contribution amount is further increased by an additional $1,000 per year for a total of $8,000 (up from $7,500 in 2023).
  • If you're over 70 ½: Once reaching this age threshold must begin taking required minimum distributions (RMDs) from any retirement accounts including IRAs annually beginning April 1st after turning 70 ½.

What if my income is too high?

If you're not eligible to contribute to a Roth IRA because your income is too high (in 2024 single filers must have an adjusted gross income (AGI) under $161,000; joint filers must have an AGI under $240,000), you may qualify for a backdoor Roth IRA, which lets you contribute aftertax dollars and then convert them to a Roth IRA. If your AGI is between $230,000 and $239,999.99 and you're filing jointly, you can make a reduced contribution.

To do this, first open a traditional IRA and fund it with $7,000 (or $8,000 if you are 50 or older). You can make regular contributions until April 15 of the next year. Then convert that account into a Roth IRA using Form 8606. After converting the account into a Roth IRA, it will be subject to taxes on any conversion gains (in addition to gains that are normally taxed when distributions are made).

What are the downsides of a Roth IRA?

Unlike traditional IRAs, your contributions to a Roth are never tax-deductible so you are not able to deduct the contribution from your income. However, this can be seen as an upside because you do not have to pay taxes on the money when you withdraw it during your retirement.

Another downside is that your withdrawals are taxed at ordinary income rates, which can be higher than capital gains rates if you've held investments for more than one year.


The Roth IRA is a great way to boost your retirement savings, especially if you think your tax rate will be higher in retirement than it is today. The amount you can contribute each year depends on your income and age, plus when you begin taking money out of your account. If you're not eligible to contribute to a Roth IRA because your income is too high, consider backdoor Roth IRAs, which let you contribute aftertax dollars and then convert them into a Roth IRA. As long as you follow the rules for withdrawing funds from your account, you won't have to pay taxes on those earnings or contributions when you withdraw them from your Roth IRA. All these features make this type of retirement savings highly attractive.

We can help you decide if a Roth IRA is right for your retirement saving needs. Contact us to get started today or ask questions about this option.

 

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Monday, 15 April 2024

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