Roth IRA

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What is a Roth IRA?

What is a Roth IRA?

by Donn J. Sinclair – MBA  April 17, 2020

Contributions to a Roth Individual Retirement Account (IRA) do not reduce your current income subject to federal income taxes.  This newer

Roth IRA does allow your contributions to grow federal income tax free.  You fund a Roth with after-tax or post-tax dollars so that later you may be eligible to make totally tax free Roth IRA withdrawals.  

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What is a Roth IRA?

What is a Roth IRA?

by Donn J. Sinclair, MBA   April 17, 2020

Contributions to a Roth Individual Retirement Account (IRA) do not reduce your current income subject to federal income taxes.  This newer

Roth IRA does allow your contributions to grow federal income tax free.  You fund a Roth with after-tax or post-tax dollars so that later you may be eligible to make totally tax free Roth IRA withdrawals.  So you forfeit the current income tax benefit for the option to make totally tax free withdrawals during retirement.  This may be especially important during any retirement years where you have large unexpected expenses.  Withdrawing additional funds from a tax-deferred Traditional IRA would increase your taxable income that year.  This may make more of your Social Security Income taxable, and may boost you into a higher tax bracket.  Your  Roth IRA may be able to provide you the extra tax-free income to cover those large unexpected expenses during retirement.  

That’s right, every penny you withdraw from your Roth IRA after 59.5 should go straight into your pocket.  This may be especially important in your early retirement years to cover additional travel as well as those unexpected expenses.

In summary there are two big differences between your Roth IRA and your Traditional IRA.  Your Roth IRA does not provide you a current tax income deduction; however, your Roth IRA should provide you a totally tax free investment to withdraw funds from after age 59.5.  Remember that your Traditional IRA might provide that current income tax deduction.   Do you Roth IRA or do you Traditional IRA ?  Well actually, in any given tax year you may be eligible to do both.  You could put 25% or 50% of your eligible deductible contribution into your Roth IRA, and then put the balance into your Traditional IRA.  You should discuss and compare with your tax advisor the benefits of contributing to both your Roth IRA and your Traditional IRA.  

Are You Eligible for a Roth IRA Contribution ?

Roth IRAs like Traditional IRAs have income eligibility limits.  So if you make too much money you may not be eligible to contribute to your Roth IRA.  Most Americans qualify for a Roth IRA contribution with an adjusted gross income of $203,000 for those Married Filing Jointly or a Qualifying Widow(er); and adjusted gross income of $137,000 for those filing Single, Head of Household, and those Married Filing Separately that did not live with their spouse anytime in 2020.  For tax year 2020 you might be able to contribute up to $6,000 into your Roth IRA.  Those age 50 plus may be able to contribute up to $7,000 into their Roth IRA.  Your Modified Adjusted Gross Income (MAGI) may reduce the above maximums, and you should consult your tax advisor for your specific situation.    

Updated by Donn J. Sinclair, MBA

in Rock Hill SC and Charlotte NC

April 17, 2020      (803)329-0615

DJS: More information is available at IRS.gov.  See Publication 590-A and Publication 590-B. This information is intended for educational purposes only, and should not be considered as a solicitation for the purchase or sale of any securities, nor be relied upon as financial advice.  Past performance is no guarantee of future results.  

 

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