What is a Roth IRA?

A Roth IRA is a retirement savings account that you set up for yourself, as an individual, rather than one that is set up for you by your employer, e.g., a 401(k) plan. Money contributed must be after-tax dollars. Although there is no tax benefit today, as with a traditional IRA or 401k plan, the contributions, interest and other earnings grow tax-free, and can be withdrawn tax and penalty free, provided you meet the rules described below.

A Roth IRA is an ideal savings option for anyone who would benefit from tax-free withdrawals in the future. In many cases, you can even open one for your children if they have some earnings. It can be an ideal tool to prepare them monetarily for the future, since whatever money they contribute will grow as long as the account is open. The Roth IRA is particularly beneficial for those that expect to be in a higher tax bracket, especially in retirement, when issues about tax-brackets, social security benefits and Medicare tax burdens may emerge.

Providence Association offers Roth IRA with a current 3.00% annual rate.

With a Roth IRA, there are no contribution age restrictions or compulsory withdrawals, i.e., Required Minimum Distributions (RMDs); even in retirement, after age 70½, you may continue to make contributions, provided you still have earnings and meet the income limitations.

Roth IRA Limits

The limitations on the amount you can contribute annually into a Roth IRA are outlined below. It is important to know that if you own a Traditional and a Roth IRA, aggregate contributions into both cannot exceed the stated annual limitations. The income limit changes from year to year so check the IRS’s website to learn what those limits are. 

Contribution Limits:

For the year 2021, taxpayers under 50 years old may not contribute more than $6,000.00, while taxpayers over 50 can contribute up to $7,00.00.

Income Limits:

Not everyone is eligible for this type of retirement account. If you make too much, you are out of luck. So take advantage now, if you can. In the year 2018 the limitations are as follows:

• Married taxpayers filing a joint income tax return cannot contribute into a Roth IRA, if their combined Adjusted Gross Income (AGI) exceeds $124,00 (in 2020); and $125,000 (in 2021
• The amount of the permitted contribution is gradually phased out where the joint AGI is between between $204,000.00 and $224,000.00 (in 2020); and between $205,000 and $225,000 (in 2021);
• Single taxpayers’ AGI limits are $124,001 – $139,000;
• Married taxpayers filing separately have severe restrictions of $0 – $10,000.

TIPS:

• If your employer offers a Roth 401(k) there are no income limits; you can certainly use that to put away after-tax dollars for retirement.

• Also, if you are on the cusp of the income limit, consider increasing your pre-tax 401k contributions. This will decrease your taxable income and your overall AGI in that year, and should, therefore, re-qualify you for the Roth IRA.

When to contribute

You have until the tax filing deadline of the current year to make contributions into your Roth IRA for the previous year, but the smartest option is to invest early, because the longer your money is invested, the more it will grow.

Roth IRA – Rules for Withdrawal

For unlimited tax-free and penalty-free withdrawals, keep the Roth IRA in place for at least five years and avoid it until retirement, or at least after age 59 ½. 

It is obviously best to keep the money invested until retirement, you will definitely need it later. Depending how much you save, it may be for everyday needs, a nice trip somewhere, or maybe to provide traditional family vacations to Wildwood. The sooner you start investing, the more chance you have to save enough for all of the above.

Still, Roth IRAs have relatively relaxed rules for withdrawing money early, which gives the investor peace-of-mind, in case something unexpected occurs.

Withdrawals of principle, or the contributions made, are allowed at any time, without tax or penalty, because you have already paid taxes on that money.

Withdrawals of earned interest and other income

Non-qualified withdrawals will be subject to a payment of income taxes and a 10% excise penalty tax.

You can withdraw tax and penalty free if:

• the account has been open for at least five years
• you are at least 59½ years old, or
  • dead and your beneficiaries are receiving the distributions from an inherited Roth IRA)
  • permanently and totally disabled
  • using up to $10,000 toward a first-home purchase

If you have not held the Roth IRA account for five years, but are taking the distribution under one of the items listed above, you may do so without penalty, but Uncle Sam still expects to be paid taxes on the interest and other earnings.

There are also some other exceptions that allow for early distributions without penalty. In these situations, the account has to be open for five years and you will need to pay taxes on the earnings and interest. These exceptions include:

• qualified education expenses
• medical expenses
  • that exceed 7.5% of your adjusted gross income for the year
  • or if unemployed, to pay health insurance premiums
• qualified reservist distributions (for members of the military reserve called to active duty)
• taking a series of substantially equal lifetime distributions
• an IRS levy

Next Step

Providence Association offers Roth IRA accounts that pay interest at the current rate of 3% annually. This rate will always compare favorably with standard CD’s and we guarantee a minimum of 2%, no matter how low CD rates might go in the future.

IMPORTANT NOTICE: FOR Additional important information (inter alia, Contribution, Adjusted Gross Income and other Limits and Qualifications) Affecting Your IRA, SEP IRA and Roth IRA Savings and Contributions for 2020 & 2021 (Click: Download Guide)

Click to read more about the benefits of Roth IRA and Traditional IRA accounts. 

Feel free to contact us for more information.

Disclaimer: This article is not intended as a substitute for legal, tax, financial, retirement, investment or other counsel or professional services and is not meant to be exhaustive of its topics. While precautions have been taken to make this article accurate, no responsibility is assumed for errors or omissions, or for damages resulting from the use of the information. Also, this information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Providence Association recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.