If you are looking into retirement, you might ask yourself what a Roth IRA is. This special type of Individual Retirement Account is an effective and tax-efficient way for individuals to save money for retirement while still receiving a future tax break in the form of tax-free income. To fund a Roth IRA, you must meet specific age and income requirements.
Eligibility for a Roth IRA
One of the things that separates a Roth IRA from a traditional IRA is that there are income eligibility limits. Individuals who make too much within a given tax year are not eligible to contribute to this type of retirement account. In order to qualify to contribute to a Roth, you must earn an income of $114,000 per year if you are single and $181,000 if you are married and file jointly. Individuals who are just above this threshold may be eligible to make partial contributions to a Roth IRA, up to the limits specified by the IRS.
Individuals can contribute money to a Roth IRA at any age, but there are contribution limits that you can only exceed if you are willing to pay a penalty. Limits can change from year to year, and when you are approaching retirement, you may be eligible to contribute “catch-up” money as well. Currently, the individuals who make less than the $114,000 and $181,000 caps are eligible to contribute $5500 per person in a single year, according to RothIRA.com. Even non-working spouses are eligible to contribute up to this limit if their working spouse can contribute to both accounts. Account holders who are over the age of 50 may be eligible to contribute $6500 in the year without being penalized.
Advantages of Roth IRA’s
There is more than one option when you are saving for your retirement, but Roth IRA’s offer many tax benefits. If you want to withdraw your contributions without being penalized by the IRS, the Roth may be the best choice. While you cannot write-off your contributions, you can tap into the money you have invested and are not subject to mandatory withdrawals. Save before and during your retirement, and enjoy the flexibility that a traditional IRA does not offer. Even wealthy investors choose to use this vehicle to pass on a tax-free inheritance to their heirs.
If you are eligible based on the income guidelines, you should consider opening your own Roth IRA. This individual account is great for the self-employed, independent contractors and employees who want to supplement their employer-sponsored retirement accounts. As a smart investor thinking about the future, it is important to assess all of your options and choose the options that offer the best growth and tax benefits. Review the current years limits, the withdrawal penalties you can be assessed and income requirements.