You’ve probably heard about a Roth IRA before; it’s one of those terms that gets bandied about on TV or the radio with great frequency. And with good reason – a Roth IRA is a retirement account which is one of the best ways to prepare for retirement. I’ll give you an introduction on Roth IRAs – what they are, why they are essential to good retirement planning, and a few other tips about Roth IRAs.
Roth IRA – One of the Best Retirement Tools
Retirement planning is something everyone needs to do. Even if you serve in the military long enough to earn a military retirement and pension, it might not be enough for your golden years. It is essential for most veterans, even retirees, to take retirement planning into their own hands, and retirement accounts such as the Thrift Savings Plan, 401k plans, and IRAs are a great way to do that.
Types of IRAs, and Why a Roth IRA Rules
There are two types of IRAs available to most people – Traditional IRAs and Roth IRAs. They are fairly similar, but have one important distinction – when you pay taxes on your contributions and withdrawals. Here is a quick primer about the differences between them:
- Traditional IRA: Contributions are tax free, withdrawals are taxed in retirement years. There are Required Minimum Distributions (RMD) once you reach a certain age.
- Roth IRA: Contributions ome from income that has already been taxed, withdrawals in retirement are tax free. There is no RMD.
Let’s break this down in simple terms. With a Traditional IRA, you can take a tax break on your income now, but you will have to pay taxes in the future when you withdraw your retirement funds. You will also have to begin taking withdrawals from your account once you reach the RMD age, whether or not you need the income.
With a Roth IRA you make contributions from income which has already been taxed, making you eligible to receive tax free withdrawals in your retirement years. This is a great deal, especially if you are in a lower tax bracket now than you anticipate being in retirement. It also takes the guess work out of retirement planning since you will know that the money you have in your account will not be subjected to taxes. Finally, you aren’t required to take distributions, so you can leave your money in your account and continue to let it grow (this can also be a great advantage when it comes to estate planning).
Roth IRA Eligibility and Contribution Limits
There are a few things to be aware of before starting a Roth IRA. First, you need to be eligible to contribute. To be eligible, you need to have earned income, and meet income requirements. There is also a special provision for military members: the HERO Act. The Heroes Earned Retirement Opportunities (HERO) Act allows military members with tax free income to be able to contribute to Roth IRAs and other retirement plans.
The next thing to consider is how much you will be able to contribute to your Roth IRA. If you meet income requirements, then you will be able to contribute up to $5,000 if you are under age 50, or $6,000 if you are age 50 or older (the additional $1,000 represents a catch-up contribution to help those closer to retirement better reach their investment goals). Here are the IRA contribution limits.
The tax avantages for IRAs are incredible, so the government limits them to people who fall within certain income brackets. If you don’t meet the income requirements to get the tax benefits from the Traditional IRA, or contribute directly to a Roth IRA, you can still contribute to a non-deductible Traditional IRA, then convert it to Roth IRA at a later date. It’s kind of like a back door which enables just about anyone to contribute to a Roth IRA.
Once You Go Roth, You Never Go back
The prospect of having a tax free nest egg in retirement is very attractive, and something I don’t recommend you pass up. There aren’t many opportunities for tax free income, especially when it comes to investments. And the longer you have before you reach retirement age, the more time you have for compound interest to increase your nest egg. If you are eligible, I highly recommend opening a Roth IRA and maxing out your contributions each year.
Take action! For more information on Roth IRAs, you can check out the Roth IRA Movement or the #RothIRAMovement on Twitter. If you are interested in opening a Roth IRA, then check out this list of recommended places, or you can visit the Mint.com IRA Finder as another option.