A Roth individual retirement account allows you to earn tax-free investment growth on your retirement savings. When you save for retirement in a Roth IRA, you don’t have to worry about a big tax bill in retirement because withdrawals are typically tax-free.
Here’s how to save for retirement in a Roth IRA:
- The Roth IRA contribution limit is $6,000 in 2021.
- For people age 50 and older, the Roth IRA contribution limit is $7,000.
- The Roth IRA contribution deadline is the due date of your tax return.
- Roth IRA income limits are $140,000 for an individual or $208,000 for married couples in 2021.
- Roth IRA contributions are not tax-deductible.
- The investment growth in a Roth IRA is usually not subject to income tax.
- Roth IRA withdrawals in retirement are often tax-free.
What Is a Roth IRA?
A Roth IRA is a retirement account that allows you to qualify for tax-free investment growth on your retirement savings. While you don’t get a tax break in the year you make a Roth IRA contribution, you can take tax-free withdrawals in retirement and avoid paying income tax on your investment returns.
“Roth money is contributed post-tax and the growth is not taxed when distributed in retirement,” says Liz Sylvan, a certified financial planner for Cultivating Wealth in Brooklyn, New York.
How Roth IRAs Work
Roth IRA contributions are made with after-tax dollars, and there is no tax deduction in the year you make the contribution. The funds in a Roth IRA grow without being taxed. Withdrawals that are taken after age 59 1/2 from accounts at least five years old are tax-free. Many people don’t have to pay any income tax on the investment growth they accumulate in a Roth IRA.
“You pay the tax now, then your assets in the Roth grow tax-free, and distributions in retirement are tax-free,” says Kyle Hill, a certified financial planner and founder of Hill-Top Financial Planning in Kansas City, Missouri.
Roth IRA Contribution Limits
You can contribute up to $6,000 to a Roth IRA in 2021. People age 50 and older can make additional catch-up contributions of up to $1,000 for a total Roth IRA contribution of $7,000. Those who exceed these contribution limits will face a 6% excise tax on the amount over the limit. You can avoid the penalty by withdrawing excess contributions before filing your tax return.
Roth IRA Contribution Deadline
Roth IRA contributions must be made by the due date of your tax return, which is usually around April 15 each year. If you make a contribution between January and April, you can choose to apply the deposit to the previous tax year or the current calendar year.
Roth IRA Income Limits
Workers must earn below certain income cutoffs to be eligible to save for retirement in a Roth IRA. Those who earn less than $140,000 as an individual or $208,000 as a married couple are eligible to make Roth IRA contributions in 2021. The Roth IRA contribution amount is phased out for those with incomes of more than $125,000 as an individual and $198,000 as a married couple in 2021. However, there are several ways to bypass these income limits by contributing to a traditional IRA or 401(k) and then converting the funds to a Roth.
How to Open a Roth IRA
You can open a Roth IRA at most banks and financial institutions. When selecting a Roth IRA provider, take care to consider the available investment options and the fees associated with the account.
“With a Roth IRA, you have the full menu with thousands of investment options,” Hill says. “You can also minimize fees and find a Roth IRA where it costs you next to nothing to invest.”
What to Do With a Roth IRA in Retirement
You can typically take penalty-free and tax-free distributions from your Roth IRA after age 59 1/2. Unlike a traditional IRA, you are not required the take withdrawals from a Roth IRA in retirement.
“Because there is no required minimum distribution with a Roth, you can continue to invest and let it grow your wealth and perhaps pass it on to your children,” says Narumi Yoshida, founder and CEO of Yoshida Wealth Management in White Plains, New York. The money can accumulate in the account until you need it, or you can leave the funds to heirs.
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