Using all the different retirement accounts available to you is one way to give yourself the best chance of becoming financially comfortable and living the life you envision in retirement. Most people are familiar with 401(k) plans because many employers offer them as benefits, but IRAs are also a great tool to use. Here are three things you seriously need to know about Roth IRAs.
1. There is an income limit
If you’re eligible to contribute to a Roth IRA, you can roll over up to $6,000 a year into the account, or $7,000 if you’re age 50 or older. Unfortunately, not everyone is eligible. If you are single and have a modified adjusted gross income of less than $129,000, you can contribute up to the limit. If you are married filing jointly, you must, as a couple, earn less than $204,000 to contribute the full amount. Beyond those levels, the amount you can contribute is reduced, and if your modified adjusted gross income is $144,000 or more ($214,000 or more if married filing jointly), you can’t contribute to a Roth IRA at absolute.
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However, if you exceed the income limit, you can still make use of this investment tool through a “backdoor Roth IRA,” a perfectly legal loophole. Creating a backdoor IRA is as simple as contributing to a traditional IRA, which has no income limits, and then converting that account to a Roth IRA. However, there are tax implications, so be aware of that before going down this route.
2. There is no minimum distribution requirement
One thing that separates a Roth IRA from a traditional IRA or 401(k) is that there are no required minimum distributions (RMDs). Because you won’t be forced to take out funds from a Roth, it can be a great tool for building family wealth. If you don’t need the funds in retirement, you can pass a Roth IRA on to an heir, giving the assets in the account more time to grow and compound. Although the original owner of the Roth IRA does not have to take RMDs, once they are transferred to a beneficiary, that person must withdraw the entire amount from the IRA within 10 years or face a penalty.
If the beneficiary is a spouse, they can treat the account as their own and will also not face RMD. If they opened the Roth IRA as a new legacy account, RMDs would be required, but they can be extended over its useful life. The same applies to minor children of the original owner, disabled or chronically ill beneficiaries, and beneficiaries younger than 10 years of age than the original owner.
3. Withdrawal rules are different from a 401(k)
With a Roth IRA, you can withdraw your contributions, but not your earnings, at any time without facing penalties. There’s also a five-year rule: You can’t withdraw any earnings tax-free until at least five years have passed since your first contribution to a Roth IRA. There are no exceptions based on age, even in retirement.
There are also two other situations where the five-year rule applies: conversions and inheritances. If he converts a traditional IRA or 401(k) to a Roth IRA, the five-year counter starts on January 1 of the year he converts. For example, if you converted a Traditional IRA to a Roth IRA in October 2021, the five-year timer would have started on January 1, 2021. If you converted on January 3, 2021, the timer would still have started on January 1, 2021. January 2021. Also, if you are the beneficiary of an inherited IRA that was not held for five years, the earnings would be taxed if you took a distribution.
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