A Roth IRA is one type of retirement account you might want to fund. Then again, once you understand how it really works, you might want to give it a big “non merci”.
It’s quite different from a traditional IRA. With the Traditional IRA, you get a write off in the year that you fund it. That means a Traditional IRA saves you tax money every year you put money in. To sweeten the deal, that money grows tax-deferred as long as you keep it in an IRA. But it’s important to keep in mind that you will pay taxes on every dollar you withdraw from the account. I guess you can’t have everything.
With the Roth, you won’t get a tax break when you make contributions. So you fund your fund a Roth with after-tax dollars. But the good news is you won’t pay taxes on the money as it grows or when you take it out.
When do you fund the Roth?
If you want to get credit for a Roth IRA, you have to fund it no later than the mid-April deadline the year following the tax year.
Can Anyone Fund A Roth?
In order to fund a Roth, you need to earn taxable income as a result of work you performed. You can’t put more money into a Roth than you’ve earned and passive income doesn’t count. The only exception is if you are or have a nonworking spouse and file a joint return.
Rather than keep it simple, the IRS also slaps some limits and restrictions on your ability to fund a Roth. The bottom line is if you make too much money, you won’t be able to fund a Roth. You might be able to fund a non-deductible IRA in that case.
Where Do You Open A Roth?
You can open a Roth IRA with a bank, insurance company, broker or custodian. The IRS couldn’t care less as long as it’s a qualified custodian.
What Happens To The Money After You Die?
If you name your spouse, they can treat your Roth like their own. That means, they don’t have to take any RMDs while they are living and they can name any beneficiary they like. If you name someone other than your spouse as the beneficiary, they can continue to grow most of the money tax-free but will be required to make annual withdrawals.
How Much Does A Roth Earn?
What your Roth earns depends on how you invest it. It can be a great investment or a terrible one – just like any other account you open. Just because your money is in a Roth doesn’t have anything to do with how much it earns. That’s because you can invest your Roth money any which way you like.
What’s The Big Deal? Is A Roth Better Than A Traditional IRA?
The answer to this question depends on:
- Your age
- Your income
- Your tax bracket now and after you retire
- When you plan on retiring
- The amount you plan on contributing to the Roth
It’s different for everybody. Here’s a cool little calculator you can play around on to check your situation.
The bottom line is, the higher your tax bracket and the younger you are, the more worthwhile the Roth becomes. That’s because the ultimate benefit of using the Roth (tax free growth and tax free withdrawals) is more valuable for those people who would otherwise be burdened with a high tax bite. And the Roth also works better for younger people because those tax benefits compound and really grow for many more years. The more time you have to cash in on those goodies, the better off you’ll be.
Is A Roth For You?
Your CPA might tell you so but I would still check it myself using the calculator I referenced above. And keep one last thing in mind. No matter what kind of retirement account you fund, it’s really important to make sure the money is invested to provide the greatest long-term growth with the least amount of risk. Find a good balance. I suggest that you refrain from being super aggressive or super conservative.
Are you funding a Roth this year? Why or why not?