Building Your Nest Egg: Understanding the Roth IRA

Building Your Nest Egg: Understanding the Roth IRA

There are numerous factors to consider when selecting an individual retirement savings plan. Regardless of whether you choose a traditional individual retirement account (IRA) or Roth IRA, planning for retirement is always a step in the right direction. To learn more about the Roth IRA and help you determine if it’s right for you, review the basics below.

What is a Roth IRA?

A Roth IRA is a retirement savings plan that allows the plan owner to contribute after-tax dollars, and cultivate those funds through investments on a tax-free basis. Funds in a Roth IRA may be invested in stocks, bonds, mutual funds, annuities and, in some specific cases, real estate. They can also be purchased from banks, so that the underlying investments would be standard banking products such as CDs and bank money markets. When the plan owner wishes to retrieve funds from the plan in retirement, he or she is not taxed at the time of a distribution that is qualified. This is the primary difference between a Roth IRA and a traditional IRA. Traditional IRAs are taxed at the time of distribution, rather than at the time of contribution. In addition, Roth IRAs are not subject to required minimum distributions.

Who can contribute to a Roth IRA?

Anyone may contribute to a Roth IRA at any time throughout the year, as long as they are within the modified Annual Gross Income (AGI) limit requirements as set by the IRS. To be eligible to contribute to a Roth IRA in 2018, one must meet the following AGI limit requirements:

• If you are married and filing jointly, or you are a widow or widower, your modified AGI may not exceed $199,000.

• If you are filing as single, the head of the household or married filing separately and you did not live with your spouse in 2018, your modified AGI may not exceed $135,000.

• If you are married and filing separately, and you lived with your spouse in 2018, your modified AGI may not exceed $10,000.

How much may be contributed each year?

Like modified annual gross income limits, the IRS sets annual contribution limits each year. For 2018, contributions to a Roth IRA may not exceed the lesser of:

• $5,500 if you are under the age of 50 – or $6,500 if you are over 50 – minus other contributions to other IRAs that you make in the year, or

• Your taxable compensation minus other contributions to other IRAs that you make in the year.

If you exceed the contribution limit when funding your Roth IRA in any given year, you will be subject to a 6 percent tax that is applied to any excess contributions.

When can I retrieve my funds?

Since the sole purpose of the Roth IRA plan is to accumulate money for retirement, in most cases, it is best to leave the funds intact until at least age 59 ó, the age in which you may begin withdrawing from the plan without complication, as long as the Roth IRA has been established for at least five years. However, if you need to make an early withdrawal, you may typically withdraw from your Roth IRA contributions free of penalty, at any time, as long as you don’t withdraw from what you have earned from investments. If you withdraw more than what you’ve contributed, you will begin to dig into your earnings, which carries a 10 percent tax penalty on those distributions in addition to income tax on the earnings portion. You may not have to pay penalty in the following situations:

• If you are paying for qualified expenses associated with higher education

• If you suffer total and permanent disability

• If you are the beneficiary of a deceased Roth IRA owner

• If you have to pay for unreimbursed medical expenses that are more than 7 ó percent of your AGI

• If you are a first-time homebuyer and need up to $10,000 for costs

• The distributions are part of a series of substantially equal payments

• Distribution of the funds is due to an IRS levy

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Retirement Income Strategies

Read about how you can set up income strategies that will have a long-term effect for your retirement years.