Roth IRA (Individual Retirement Account) is a type of retirement account available in the United States. The primary appeal with the Roth IRA is that your contributions and the earnings on them can grow tax-free and be withdrawn tax-free, provided that you fulfil the requirements. The general rule is that you must be at least 59 ½ years old, and your Roth IRA must be at least 5 years old, before you can withdraw any money tax-free.
Before you decide to open a Roth IRA, make sure you take a look at the other qualified retirement plan accounts that may be available to you in the United States. Generally speaking, the Roth IRA is less restrictive than the other accounts, but it does have its limitations and drawbacks, and the other accounts have their own respective benefits. It is important to take a look at the whole picture and select the account type, or combination of accounts, that is best for you in your particular situation.
Roth IRA vs. Traditional IRA
The main differences between a Roth IRA and the Traditional IRA concerns taxation. You put after-tax dollars into your Roth IRA. The contributions are not tax-deductible. With a Traditional IRA, you are allowed to contribute pre-tax income.
The Roth IRA tends to be popular among investors who have reason to believe their marginal taxes will be higher in retirement than right now.
Where can I open a Roth IRA?
In the United States, most banks offer both the Traditional IRA and the Roth IRA. There is also a wide range of brokerage firms and investment companies available that offer these account types.
How can I fund my Roth IRA?
You can fund your Roth IRA from a number of sources, including regular cash contributions, spousal IRA contributions, rollover contributions, transfers, and conversions from another (eligible) retirement plan.
Regular Roth IRA contributions are monetary; they can not be in the form of securities or property.
Can I keep something else than money in my Roth IRA?
Yes you can. Once you have put money into your Roth IRA, you can use it to invest. A wide range of investment types are permitted, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), money market funds, certificates of deposit (CDs), and cryptocurrency.
Important: You can not contribute any of this directly; you have to put money into your Roth IRA first and then use that to buy your desired investment, e.g. shares in a stock company, shares in a mutual fund, or Bitcoin cryptocurrency.
Examples of products that you can not keep in your Roth IRA are derivatives and life insurance contracts.
The Roth self-directed IRA (SDIRA)
If you want a broader than normal range of investment options, you need to open a Roth self-directed IRA (SDIRA). With a SDIRA, you will be permitted to invest not just in the types of investments mentioned above, but also in more unusual things, such as gold, investment real estate, a franchise business, or partnerships.
How much can I put into my Roth IRA?
How much a person is allowed to put in their Roth IRA changes periodically. For the year 2022, the upper limit was $6,000 for the year for people under 50 years of age, and $7,000 for people aged 50 and above.
For more information, contact the Internal Revenue Service (IRS) or visit their site. The contribution limit set by the IRS apply across all your IRA:s.
Upper earning limits for the Roth IRA
You are not allowed to contribute to your Roth IRA if you earn above a certain limit. For the year 2022, that limit was $144,000 for a single filer, and $214,000 for a married couple filing jointly.
No required minimum distributions
While the well-known 401(k) account type and the Traditional IRA both have required minimum distributions, there are no such requirements for the Roth IRA.