The topic of retirement planning is nothing new to forward-thinking individuals. While retirement may be decades in the future, now’s the time to begin planning. The modern financial industry offers a myriad of options. Investments such as 401(k)s and SEP plans offer basic-level retirement planning. However, many find these plans to be too restrictive. Roth IRAs are attractive to many as it offers tax-free retirement income. While there are drawbacks, for some, the benefits far outweigh any disadvantage.
Perhaps the most important topic when answering “What is a Roth IRA?” is its contribution limits. Roth IRA contribution limits are directly based upon the account holders’ income. Account contributions cannot exceed annual income for each year. In fact, the amount one may contribute may be reduced due to the account holder MAGI, or modified adjusted gross income. While exact contribution limits vary from year-to-year, the general limits are as follows: those under 50 years of age may add up to $5,500 per year and those over 50 years of age may add up to $6,500 per year.
Roth IRA eligibility is determined by annual income. Single person households are eligible for full contributions if they make less than $144k per year. However, partial contributions may be made if a single person household earns between $114k and $129k. Married households, who file jointly, may contribute if they earn less than $191k per year. There are no age limitations. As long as one earns income, they may contribute and experience a future tax break. This Individual Retirement Account features three distinct advantages over other retirement options. The first being flexibility. Generally, an account holder must have an active account for five years and be 59.5 years of age before accessing cash. However, exceptions exist. Account holders may access $10,000 to purchase a home, pay college tuition or cover bills due to a disability.
Unlike a traditional IRA, a Roth IRA does not require mandatory withdrawals. This allows contributions to grow without being disturbed by distributions. While a Roth IRA may be passed along to an heir, inherited IRAs do require periodic cash disbursement. The last primary advantage is the lack of contribution caps. Traditional IRAs, and other retirement accounts, prevent contributions once the account holder reaches a certain age. Contributions may continue as long as income limits aren’t surpassed.