Roth IRA Basics to Get You Started
A Roth IRA (Individual Retirement Plan) is an investment account designed for retirement savings.
Benefits of a Roth IRA
The primary benefit of a Roth IRA over a traditional IRA is that you pay taxes when you deposit money you put into your account at your current tax rate. If you expect to be in a higher tax bracket later during retirement, it may be beneficial to pay taxes now for tax-free withdrawals during retirement.
Traditional IRAs and 401(k)s have required distributions once you reach 72. Roth IRAs don’t have any required distributions.
When you reach 59 ½ and you’ve had the account for at least five years, any distributions won’t be taxed by the IRS.
Withdrawing investment earnings before age 59 ½ will likely be taxed, but withdrawing your deposits can be done at any time without tax penalties. This gives a level of access to your money that is not available in other investment accounts.
Drawbacks of a Roth IRA
A Roth IRA is generally less restrictive than other retirement accounts. However, a Roth IRA is not the perfect solution for all retirement savers.
With a traditional IRA, you are allowed to calculate your IRA contributions into your federal tax deductions. This is not allowed for Roth IRA contributions.
With most 401(k) plans, you are allowed to take a loan out of your retirement savings plan. Loans on Roth IRAs are not allowed, but you can withdraw your contributions without penalty.
If you are younger than 59 ½ and your withdrawal exceeds your contributions to include some amount of the investment earnings, you will likely be faced with a 10% penalty and taxes on the earnings. There are some exceptions to the 10% penalty.
Roth IRA vs Designated Roth IRA
The difference between a Roth IRA and a Designated Roth IRA is largely contribution limits.
A Roth IRA is available to anyone with earned income.
Contributions: You can contribute up to $6,000 to a Roth IRA or $7,000 if you are at least 50 years old as of 12/31/21.
Contribution Limits: Annual contribution totals have limits with higher income levels. Allowed contributions decrease as income reaches the specified thresholds and are not allowed if you reach maximum income levels.
- unmarried tax payers with income under $140,000 (2021)
- joint filers with income below $208,000
A designated Roth account (DRA), also called a Roth 401(k), is a Roth IRA available through an employer’s 401(k) or 403(b) retirement plan.
Contributions: You can contribute up to $19,500 annually or $26,000 if you’re at least 50 years old as of 12/31/21.
Contribution Limits: Income levels do not affect contribution limits.
Keep in mind that the IRS can change the contribution limits every tax year. Be sure to check the limits each year, so you don’t over contribute and face tax penalties.
How Much Money Do You Need to Start a Roth IRA?
The IRS does limit the total contributions in a tax year, but they do not have a required minimum contribution amount to open a Roth IRA.
A required initial contribution depends on the investment types you are interested in for your Roth and on the provider.
For example, if you are considering mutual funds for your Roth IRA investing, many mutual funds have at least a $1,000 minimum to get started.
A minimum amount is generally required to get started with a Roth IRA at many credit unions, banks, brokers, or providers. However, there are options with lower starting amounts or even no minimum deposits. Do some research to find those accounts with lower initial deposit requirements, and make sure to read the fine print.
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