Retirement accounts can be a smart way to build your nest egg, not only because of the tax advantages they offer, but the fact that they can be an easy way to help make your money go even further. At the top of this dynamic group of retirement accounts sits the Roth IRA.
Although simple in concept, many people find the Roth IRA shrouded with rules and limits that can make them appear overly complex. To simplify we are highlighting four common facts about Roth IRAs so that you can better understand how these beneficial retirement accounts work, as well as highlight the differences between different types of IRAs.
Fact #1: Contributions to a Roth IRA are not tax-deductible
With a Roth, you pay taxes upfront on the money that you contribute to the account (the opposite of a traditional IRA).
Fact #2: You can't contribute to a Roth IRA if your income is too high
The fact is, not everyone qualifies to be able to contribute to a Roth IRA. Simply put, the amount you can contribute to a Roth IRA is reduced or even eliminated altogether when your income level reaches a certain limit. For example, in 2017, if your income for married filers is somewhere between $186,001 and $196,000, your 2017 Roth IRA contribution limit phases out.1
Fact #3: It's okay to let your Roth IRA sit and stay
Financial situations can change. So if you contributed to a Roth IRA in the past but now make too much money to be eligible, you can let your Roth IRA sit and wait while you get to work on contributing to more traditional retirement accounts. If in the future your income adjusts down, you can always pick up where you left off and begin making contributions again to your Roth. Keep in mind that IRS rules change from year to year, so be sure to review the IRS publication 590 for a list of current income limits and updated rules.
Fact #4: Withdrawals from your contributions are penalty-free
Because your contributions to your Roth IRA are made with money that has already been taxed upfront, you can withdraw them with no penalty. However, earnings that are withdrawn on the account before age 59½ are subject to income taxes plus a 10 percent early withdrawal penalty.
Read more information on retirement accounts and planning for retirement.