Roth IRAs — Building tax-free retirement income
Who is eligible?
If you earn taxable income below certain IRS-defined limits, you can contribute to a Roth IRA. The income limits are tied to your marital status and how you file your taxes. The IRS periodically adjusts these limits, so check with your tax advisor or speak to a financial professional to see if you qualify.
You invest after-tax money in a Roth IRA, but your withdrawals are income tax-free.
What are the tax breaks?
Since you fund a Roth IRA with after-tax dollars, you get your tax break— tax-free income—on the back end, when you withdraw your money. As long as your money stays invested, it has the potential to grow tax-free.
How do withdrawals work?
In order to make “qualified” tax-free withdrawals, you must:
- Have your Roth IRA for at least five years, AND
- Met one of the following eligible events:
- Attain age 59½
- First-time home buyer’s eligibility – up to $10,000
If you take withdrawals that are not “qualified,” you may be hit with income taxes and IRS penalties. If you’re under age 59½, you can take withdrawals without penalty under certain IRS-approved exceptions.
Unlike a traditional IRA, you do not have to take mandatory minimum withdrawals when you reach age 70½. You can leave the money in your Roth IRA and let it continue to grow income tax-free or even pass income-tax free retirement savings on to your spouse or other beneficiaries.
Can I switch from a traditional IRA to a Roth IRA?
If you decide that tax-free income in retirement is important to you, you can convert a traditional IRA to a Roth IRA. However, the money you move into the Roth IRA is counted as income in the year you make your conversion, so you have to pay income taxes on the converted balance. After this one-time tax hit, your Roth IRA has the the ability to grow income-tax deferred and potentially receive income tax-free withdrawals..
Is a Roth IRA right for you?
The potential to build up a source of tax-free retirement income makes a Roth IRA an enticing investment, particularly if you think you might be in a higher tax bracket when you retire. If you think you might be in a lower tax bracket, consider a traditional IRA for an immediate tax deduction. For even more tax planning flexibility, consider dividing your retirement savings between a Roth and a traditional IRA.