Roth IRA

What Is A Roth IRA?

A Roth Individual Retirement Account (IRA) is a trendy avenue explored by individuals to save for retirement, offering some perks, including the ability to make tax-free withdrawals upon retirement.

This retirement-planning benefit comes with its peculiar structure, income limits, advantages, drawbacks and is slightly different from the traditional individual retirement accounts, as will be discussed shortly.

Contributions and investment gains are compounded to be obtained at the time of the depositor’s choosing or for inclusion in their estate.

Deeper Definition

After-tax monetary deposits are grown to be withdrawn at retirement by depositors aged 59 or older with the opportunity to sign up whenever depositors wish to.

This flexibility, however, comes with the caveat that early withdrawals of earnings could mean that a 10 percent bonus penalty would be charged or that taxes would be imposed, except in some instances, e.g., for qualified educational expenses.

It is also important to note that five years must have elapsed since the first contribution to a Roth IRA, beginning on January 1 of the year of initial deposit; as such, early planning is essential.

As of 2021, contributions of $6,000 per annum are permitted for individuals 50 years old or less.

For those over 50 years old, an additional contribution of $1,000 is permissible every year.

Contributions are welcome from anyone who earns a living in a given year such that the lesser of the maximum annual contribution or the individual’s earnings can be topped.

The spousal IRA allows income-earning spouses to make contributions up to the maximum contribution or total annual income.

The income limits for direct contributors are $125,000, rising to $140,000 for individual filers and $198,000, rising to $208,000 for marriage partners that are filing jointly. Irrespective of these limits, however, it is still possible to open a Roth IRA using a ‘backdoor Roth IRA’ by opening a traditional IRA and subsequently converting the account.

Summarily, the Roth IRA is a prevalent retirement savings option that makes earnings tax-free and provides convenient estate planning opportunities.

Roth IRA Example

A particular hedge fund manager, aged 40 looking ahead to retirement, begins depositing $6,000 after-tax annually for a Roth IRA. Aged 59 and over, he is entitled to make tax-free withdrawals.