What is a Roth IRA?

Roth IRA: An Overview

A Roth IRA (individual retirement account) is an account that allows qualified withdrawals on a tax-free basis provided certain conditions are met. Roth IRAs are funded with after-tax dollars which means the contributions are not tax-deductible. However, once you start withdrawing funds, the money is tax-free.

  • A Roth IRA is a retirement account where you pay taxes on the money going into the account and all future withdrawals are tax-free.

  • Roth IRAs are best when you think your taxes will be higher in retirement than they are right now.

  • You can't contribute to a Roth IRA if you make over a certain amount of money. Currently, the limit for a single person is $140,000. In 2022, the limit will increase to $144,000. For married couples the limit is $208,000. In 2022, the limit will increase to$214,000.

  • The amount you can contribute changes occasionally. In 2021, the contribution limit is $6,000 a year if under 50. If age 50 or older, you can contribute up to $7,000.

  • Almost all brokerage firms, banks and investment companies offer a Roth IRA’s.

Details on Roth IRS’s

Contributions

Similar to other retirement accounts, the money invested within the Roth IRA grows tax-free. However, a Roth IRA is less restrictive than other retirement accounts. The account holder can maintain the Roth IRA indefinitely and there are no required minimum distributions during their lifetime, (unlike 401(k)s and traditional IRAs).

A variety of investment options exist within a Roth IRA, including mutual funds, stocks, bonds, ETFs, CDs, and money markets. However, not all financial institutions are created equal. Some IRA providers have an expansive list of investment options, while others are more restrictive. Every institution has a different fee structure for your Roth IRA, which can have an impact on your investment returns.

Your risk tolerance and investment preferences are going to play a role in choosing a Roth IRA provider. If you plan on being an active investor and making lots of trades, you want to find a provider that has lower trading costs. Some providers have more diverse stock or exchange traded fund offerings than others; it all depends on the type of investments you want in your account.

If your account is located at a bank, be aware that IRAs are under a different insurance category than traditional deposit accounts. Coverage for IRA accounts is not as extensive. The Federal Deposit Insurance Corporation (FDIC) offers insurance protection up to $250,000 for Roth IRA accounts, but account balances are combined rather than viewed individually.

The IRS regulates how much money you can deposit into a Roth as well as the type of money you can deposit. Essentially, you are only allowed to used earned income to fund a Roth IRA.

Withdrawls

You can withdraw Roth IRA contributions (both tax- and penalty-free) if you take out only an amount less than or equal to the sum you've contributed. This distribution is not considered taxable income and is not subject to any penalty (regardless of age or how long it has been in the account). However, the rules are a bit different for withdrawing account earnings. For distribution of account earnings to be considered a qualified distribution (free form taxes) it must occur at least five years after the Roth IRA is established and funded, and the distribution must occur when the Roth IRA owner is at least 59½ years of age.

Roth IRA Conclusions

Advantages

Roth IRAs do not include an employer match but they do allow a greater diversity of investment options. Roth IRAs can also be beneficial for individuals who anticipate they will be in a higher tax-bracket when they’re older. In Roth IRAs, you can withdraw your contributions (but not earnings) tax and penalty-free. You can manage how you want to invest your Roth IRA through setting up an account with a brokerage, bank, or qualified financial institution. 

Disadvantages

Roth IRAs, unlike 401(k)s, do not include an upfront tax break. Also, annual contribution limits are about a third of 401(k)s. For some high-income individuals, there are reduced or limited contribution amounts.

At Verdia, we trade within Roth IRAs due to their flexibility and the attractive tax and retirement benefits.

Happy Trading, Verdia

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