Return To Blog

The Trusted Denver Wealth Management Team Shares Some Fascinating Facts About Roth IRAs

March 14, 2018

Planning for retirement is one of the most important things every working individual can do, regardless of age, marital status, or where they’re at in their career. However, for many people, deciding on the right method to save for retirement and the right type of account to invest in can be tough. An IRA may be the best option for your needs, but if you’re not familiar with these retirement accounts, understanding just how they’ll benefit your financial planning efforts can be a bit confusing. Here are a few interesting facts about Roth IRAs so you can better understand how these  accounts will help you get ready for retirement with ease.

Roth IRAs are becoming more and more popular

Believe it or not, Roth IRAs can be used in conjunction with a 401(k), making them ideal for individuals looking to utilize their employer-matched retirement fund at the same time. These plans allow you to ultimately save more each year towards your retirement, helping set you up for success when the time comes to leave the workforce. IRAs are also a simple way to maximize your tax refund, giving you a tax break each year that you contribute to the account.

Roth IRAs ask you to pay taxes up-front

Traditional IRAs allow you to contribute to the account with pre-tax income. You’ll only pay taxes once you start taking distributions from the IRA. When you contribute to Roth IRAs, however, you’ll be expected to pay taxes on the money you contribute. Though it may seem like a downside, paying taxes now can help save you money in the future, especially if you believe you’ll be in a higher tax bracket as you progress in your career. Once you do start taking distributions, that money is paid to you tax-free—you’ve already paid tax on the funds. Keep in mind that you can only contribute to a Roth IRA if you make under $133,000 singly or $196,000 as a couple.

Income limits can be overcome

Though on the surface it seems that high-income earners are barred from participating in or opening a Roth IRA, it’s not entirely true. In fact, the IRS will let high earners convert a traditional IRA to a Roth IRA once a year in a process known as the back-door approach. While you’ll be able to enjoy the benefits of the Roth IRA once you convert a traditional account, you will have to pay taxes on the funds used in the conversion when you initiate the process.

You can contribute at any age

Though saving for retirement may not be a priority when you’re first starting your career, it’s still important. Luckily, you can enroll in a Roth IRA at any time and make contributions of up to $5500 per year while you’re under age 49. Once you get closer to retirement, you’re allowed to contribute a maximum of $6500 each year to speed up your retirement savings. When you combine contributions with those made to a 401(k), you’re setting yourself up for a financially successful and stable retirement with reliable income.

There are no minimum distribution requirements for the account-holder

With traditional IRAs, you’re required to take minimum distributions once you reach 70 ½ years of age. However, Roth IRAs do not have a minimum distribution requirement, allowing you to grow your savings for your beneficiaries. If you’re looking to leave a legacy for your family, this account-type is a wonderful addition to your savings plan. Keep in mind that your beneficiaries will have to take required minimum distributions once you pass, so the money you save will not be able to roll over into another IRA in their name.

You can withdraw contributions

Roth IRAs earn gains on the contributions you make. However, unlike other funds, you’re free to take your contributions out of the fund at any time. There are no penalties or additional taxes to pay, making it ideal for individuals wanting to save for their retirement, but are hesitant to lose access to their money. Keep in mind, you’ll only be able to remove your contributions, not the gains earned on the money. The gains stay in the account until you have access to them at the age of 59 ½.

There’s no such thing as a joint IRA account

You share everything with your spouse, so it makes sense that you’d want a joint retirement account, right? While it would be convenient, you cannot share a Roth IRA with your spouse. By having separate accounts, you can maximize your retirement savings and simplify tax reporting at the end of the year. However, you will be able to list your spouse as the beneficiary of your IRA, so you’ll both be able to enjoy the distributions no matter what happens when you retire.

Investment gains are not distributed immediately

Roth IRAs are great retirement planning options, but there are a few regulations they follow that differ from other types of retirement accounts. Though your contributions earn interest as soon as they’re placed into the investment pool, you won’t be able to have access to the gains on the contribution until 5 years after the money was put in the account.

Early withdrawal is available—with a catch

Unlike other retirement accounts that penalize you for taking money out prior to retirement age, Roth IRAs allow you to make an early withdrawal for qualifying reasons. For example, if you need money to pay medical bills which cost more than 7 percent of your gross income for the year, you’ll be able to request an exemption. The full list of exemptions will be available from you financial planner should you ever need access to the money.

Ready to open a Roth IRA? Contact Foxstone Financial today. Our dedicated financial planners will help you establish a retirement plan designed to meet the needs of you and your loved ones. We’ll get to know you, your goals, and your risk tolerance to ensure that you’re comfortable with every investment strategy we utilize. Call 303-988-5443 to schedule a financial planning consultation with our team.