Roth IRA – Explained Today's video covers all the most frequently asked questions on Roth IRAs. SUBSCRIBE to NOT being a transaction ever again... Like us on Facebook! Follow us on Twitter! What is a Roth IRA? A Roth IRA is an individual retirement account in which money grows tax-free. How does a Roth IRA work? A Roth IRA is funded with after-tax money. Your money can grow here depending on the investments chosen, then your withdrawals in retirement are tax-free. Why do I need or even want a Roth IRA? To us, opening and funding a Roth IRA may be one of the best moves someone can make financially. Look at these advantages of owning a Roth IRA… Some of the Advantages of a Roth IRA: Tax-free distributions – This is the #1 benefit of a Roth IRA. You funded this account with after-tax money, and in retirement your proceeds will be yours, free and clear of taxes. The key is to hold the account for 5 years or longer and be above the age of 59 ½. No Required Minimum Distributions – Unlike the Traditional IRA, there are no required minimum distributions (RMDs) required at any age. This allows your funds to continue to grow tax-free. Better terms for early withdrawals than an IRA – If you need funds from this (emergency), you will not be penalized for early withdrawals of your contributions. The 10% penalty will only be on the earnings if they are withdrawn prior to age 59 ½. Withdrawals from an IRA before 59 ½ have a 10% penalty, and you must pay income taxes on the amount withdrawn. Tax-free withdrawals for heirs – Unlike Traditional IRAs, your heirs will pay no taxes on the proceeds from an Inherited Roth IRA. Easy to open – Almost anyone can open one if you have earned income. The contribution limits for 2021 are $6000, and $7000 if you are 50 and older. What investments can be placed in a Roth IRA? A Roth IRA is more flexible than other retirement accounts, like a 401(k). You can invest in almost anything, like stocks, bonds, mutual funds, ETFs, and even real estate. What are the Contribution Limits for a Roth IRA? For 2022 and 2021, the total contributions you make each year to all your Roth IRAs can’t be more than $6,000, ($7,000 if you are age 50 and older) Phaseout for contributing to a Roth IRA The phaseout range for married couples filing jointly who are covered by a workplace retirement plan and contribute to a Roth IRA in 2022 will increase. For 2022, it will be between $204,000 and $214,000, up from $198,000 and $208,000 in 2021. What if I am in the phaseout range? 6% penalty per year for every year for all excess funds remaining in the Roth IRA. What happens if I pass the phaseout range? 6% penalty per year for every year the excess funds remain in the Roth IRA. How Do I fix it?: What are the Withdrawal Rules for a Roth IRA? Roth IRA tax-free withdrawal and IRS penalty rules vary depending on your age, how long you've had the account and other factors. Withdrawals must be taken after age 59½. Withdrawals must be taken after a five-year holding period. There are exceptions to the early withdrawal penalty, such as a first-time home purchase, college expenses, and birth or adoption expenses. Roth IRA withdrawal rules if you are age 59 and under You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. But, you may have to pay taxes and penalties on earnings in your Roth IRA. If you take withdrawals from a Roth IRA, you've had less than five years. If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations: You use the withdrawal to pay for a first-time home purchase. You use the withdrawal to pay for qualified education expenses. You use the withdrawal for qualified expenses related to a birth or adoption. You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you're unemployed. If you take withdrawals from a Roth IRA, you've had more than five years. Roth IRA withdrawal rules if you are over 59 ½: And you take withdrawals from a Roth IRA you've had less than five years: Your earnings will be subject to taxes but not penalties if you haven't met the five-year holding requirement. And you take withdrawals from a Roth IRA you've had more than five years: You can withdraw money from a Roth IRA with no taxes or penalties if you've met the five-year holding requirement. How to open a Roth IRA? Determine how you want involved you want to be in the process. DIY – Do It Yourself Let someone else manage it. Answering #1 will help you determine where to open your Roth IRA: DIY – Do It Yourself Online brokers (TD Ameritrade, Schwab, E*TRADE, etc.) Fund your account: Deposit funds into your account up to the annual limits....(read more)
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