Reasons To Go Roth

Ahh.. the Roth IRA. The unicorn of investment accounts. We have referenced Roth IRA's many times but have never gotten down to the nitty gritty of what makes them special. Today, we're going to be breaking down the reasons to go Roth IRA:

1. What is a Roth IRA?

A Roth IRA is an Individual Retirement Account that is named after the Senator who pushed it into legislation, William Roth. It was established in 1997 as part of the Taxpayers Relief Act. The goal of the Roth IRA was to allow funds to grow tax-free and this made it a one-of-a-kind investment opportunity. Up until now, all investment accounts were taxed either the year in which they grew (brokerage), or when they were withdrawn (traditional accounts). 

2. Contributions 

The contributions to a Roth IRA are made with after-tax dollars meaning, your funds have already been taxed, have hit your bank account, and now are ready to be used as contributions. This is unlike other investments that are contributed to accounts before tax has been taken out. Why is this an important difference? This is why you do not not have to pay taxes in the future aka tax-free growth. Here are the 2018 contribution limits: 

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3. Conditions

To qualify for a Roth IRA you must have earned income for the year and it must not surpass that of which you have contributed. For example, you cannot earn $2,000 for the year and contribute $5,000. You must have earned at least the amount you have contributed. As you can see above, there are also income restrictions. You are ineligible to contribute if you have earned over $135,000 as an individual or $199,000 as a couple. 

4. Can I take my Money Out?

One of the advantages of a Roth IRA is that you can always take out the principal amount (the amount you have put in) tax-free. However, your earnings portion will be taxed and a 10% penalty will be placed if you redeem it before you are 59 1/2. There are qualified reasons to withdrawal or redeem your funds that allow you to avoid this penalty. Full list:

  • You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
  • You use the withdrawal to pay for qualified education expenses.
  • You're at least age 59½.
  • You become disabled or pass away.
  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
  • The distribution is made in substantially equal periodic payments.

5. WHere can I open a roth ira?

You can open a Roth IRA many places such as a bank, mutual fund company, or trading platform. If you open a Roth in a trading platform you have all the capabilities of a brokerage account for investments (individual stocks, bonds, ETFs, etc). If you are opening your Roth at a mutual fund company you will only be able to invest in mutual funds that company sells. If you open your mutual fund at a bank, the same is true. If you want the most options for investments, go with a trading platform like TD Ameritrade, Schwab, or Fidelity. For more information click here

Elizabeth Thompson