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Investing

What Is a Roth IRA? What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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When it comes to saving for your golden years, Roth IRAs are one of the most popular accounts out there. They combine many of the tax advantages retirement plans are famous for, along with the flexibility of being able to open one on your own instead of through your employer. This article covers everything you need to know about Roth IRAs.

What is a Roth IRA?

A Roth IRA is an individual retirement account that offers tax-free withdrawals in your retirement years. With a Roth IRA, you invest your already-taxed dollars in an investment account, where it has the potential to grow tax-free over the years. Once you reach the age of 59 1/2 and your account has been open for at least five years, you are able to withdraw your funds, tax-free.

How a Roth IRA works

  • It’s an account you open on your own, not through your employer. Unlike retirement plans that you can sign up for through your employer — 401(k) plans, for example — Roth IRAs are individual retirement plans that you open on your own. Most big banks and brokerage firms like Fidelity, Charles Schwab and Vanguard offer Roth IRA products with low minimum deposits and minimal fees.
  • It’s an investment account, not a savings account. When you open a Roth IRA, you’re investing your money rather than stashing it in savings. How much your investments gain — or lose — will depend on how you invest your funds. When opening a Roth IRA, your broker typically lets you choose an investment strategy based on your risk tolerance and age. Your Roth IRA may consist of ETFs, mutual funds, individual securities, stocks, bonds, U.S. Treasuries, annuities and even FDIC-insured CDs.
  • You have to pay taxes on your contributions. One of the core components of Roth IRAs is that they are funded with after-tax dollars, meaning you have to pay taxes on the money you contribute.
  • Your contributions and earnings grow tax-free, and are withdrawn tax-free. The chief benefit of Roth IRAs comes into play when it’s time to withdraw. Your contributions and earnings that compound and grow within your Roth IRA are able to do so tax-free, and you won’t have to pay taxes on the funds you withdraw. This is why Roth IRAs are often considered a great option for those who anticipate being in a higher tax bracket in the future — you’ve already paid taxes on the money you’re taking out, but at a lower rate.
  • There is no limit to how long you can contribute. The beauty of Roth IRAs is that there is no deadline as to when you are required to stop contributing. However, there are rules when it comes to contributions and withdrawals — which we dig into later in this article.

Roth IRA benefits

As a retirement savings vehicle, Roth IRAs offer a plethora of benefits including:

  • Tax breaks. The key benefit of Roth IRAs are the tax advantages they provide: Your earnings can grow tax free and you’re allowed qualified, tax-free withdrawals in your golden years.
  • No RMDs. Unlike other retirement plans, Roth IRAs stand out for the fact that they don’t require you to begin taking required minimum distributions (RMDs) once you hit a certain age. If you don’t want to be on a timeline for withdrawals, Roth IRAs are a good option for you.
  • No taxes for beneficiaries. If you want to pass down your Roth IRA to a beneficiary, they will benefit from being able to make tax-free withdrawals. It’s worth noting, though, that inherited Roth IRAs are subject to RMDs.
  • More lenient early withdrawal rules. Compared to other retirement plans, Roth IRAs are a bit more lenient when it comes to early withdrawals. IRA-specific exceptions to the early withdrawal penalty are relatively numerous and relevant: Medical bills or health insurance premiums, for example. In addition, you’re able to withdraw contributions (though not earnings) from your Roth IRA at any time, tax-free and penalty-free.

Roth IRA contribution limits

The IRS caps how much you’re allowed to contribute to your Roth IRA per year. For 2020, your contributions to both your traditional and Roth IRA (combined) cannot exceed:

  • $6,000 for those under 50
  • $7,000 for those 50 and older

In addition to how much you’re able to contribute to your Roth IRA, there are also rules as to who can contribute to a Roth IRA, based on income. In general, high-earners typically cannot contribute to a Roth IRA, or are capped at how much they can contribute annually. One way to get around this rule is through a backdoor Roth IRA. A backdoor Roth IRA is when you contribute to a traditional IRA (which does not have income limits) and then convert it to a Roth IRA. There are tax implications to this strategy, though, that are certainty worth considering.

Roth IRA income limits are based on your modified adjusted gross income; for 2020, the income limits are as follows:

Filing statusEligible to contribute up the full amountEligible to contribute reduced amountNot eligible to contribute
  • Single
  • Head of household
  • Married but filing separately (if you did not live with your spouse during the year)
$123,999.99Income of $124,000 to $138,999.99Income of $139,000 or more
  • Married filing jointly
  • Qualified widow(er)
Up to $195,999.99Income between $196,000 and $205,999.99Income of $206,000 or more
  • Married filing separately (if you did live with your spouse)
N/AIncome up to $9,999.99Income of $10,000 or more

Any contributions you make must be made with what the IRS considers “earned income,” (such as wages, salaries, tips or commissions). That means the following types of funds are not eligible for a Roth IRA:

  • Earnings and profits from properties
  • Interest and dividend income
  • Pensions or annuity income
  • Unemployment income
  • Social Security

However, one exception to this rule is the Roth spousal IRA. A Roth spousal IRA allows a working spouse to make contributions on behalf of a nonworking spouse.

Roth IRA withdrawal rules

While Roth IRAs do come with the major benefit of not having to make required minimum distributions — meaning you don’t have to start making withdrawals at a certain age — you do have a few rules that you must follow.

In order to reap the core benefit of a tax-free and penalty-free withdrawal, you have to be at least 59 1/2 years old and have had the Roth IRA for a minimum of five years. Exceptions to the early withdrawal penalty include:

  • Qualified higher-education expenses
  • First-time home purchases
  • Medical expenses
  • Disability claims
  • Health insurance
  • Substantially equal periodic payments
  • Involuntary distribution due to an IRS tax levy
  • Reservist distributions

Roth IRA vs. Roth 401(k)

A Roth IRA is not the only Roth iteration of a retirement plan — there’s also the popular Roth 401(k) option. The chart below outlines the main differences and similarities between a Roth IRA and a Roth 401(k).

 Roth IRA Roth 401(k)
Annual contribution limits $6,000 for those under 50
$7,000 for those 50 and older
$19,500 for those under 50
$26,000 for those over 50
Income requirements Income limits based on modified AGINo income limitations
Contribution taxationContributions are made with after-tax dollars Contributions are made with after-tax dollars
Withdrawal taxationContributions and earnings for qualified withdrawals are not taxed Contributions and earnings for qualified withdrawals are not taxed
Required minimum distributions NoneMust begin no later than 72 unless you’re still working or own less than 5% of the company for whom you work

Roth IRA vs. Traditional IRA

Roth IRAs are also highly-comparable to traditional IRAs, and while they share many of the same core features, they also have significant differences. The chart below stacks up the Roth IRA against the traditional IRA.

 Roth IRA Traditional IRA
Annual contribution limits $6,000 for those under 50
$7,000 for those 50 and older
$6,000 for those under 50
$7,000 for those 50 and older
Income requirementsIncome limits based on modified AGINo income limits
Contribution taxationContributions are made with after-tax dollars and are not deductible Contributions can be made with pre-tax dollars and are deductible
Withdrawal taxation Contributions and earnings for qualified withdrawals are not taxed Deductible contributions and earnings for withdrawals are taxed as regular income
Required minimum distributions NoneRequired beginning in the year you turn 72

How to open a Roth IRA

Opening a Roth IRA can be easily done at an online brokerage firm, robo-advisor, bank or other financial institution. While each financial intuition has its own set of instructions when opening a Roth IRA, you can expect to take the following steps:

  1. Determine your eligibility. Before opening a Roth IRA, make sure your income does not make you ineligible and that you have earned income to contribute.
  2. Select your account. With so many financial institutions offering Roth IRAs, the process can be daunting. You can check out our top picks for Roth IRA providers, in which we prioritized factors including fees, portfolio construction, customer service, research offerings, account minimums and firm reputation.
  3. Select your investments. After opening a Roth IRA, you have to tell your contributions where to go. Most Roth IRAs offer the option to either select a complete portfolio in a single fund (such as a target date fund) based on when you want to retire and your risk tolerance, or the ability to customize your own portfolio.
  4. Fund your account. Typically, you can fund your account with money from a check or a direct transfer from your bank account, funds that are rolled over from a 401(k) or from an existing IRA.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Life Events

Estate Planning Checklist: 6 Key Steps To Take

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Estate planning — the process of making a plan for your assets after your death — includes many components, encompassing everything from trusts and wills to life insurance. This article will provide you with a six-step checklist to help you streamline the process of estate planning, ensuring all key aspects are covered.

What is estate planning?

Estate planning is when an individual or family makes plans for the transfer of their assets after their death. Those assets can be transferred through vehicles such as wills and trusts. Wealth that is often considered in estate planning includes the person’s total property, such as real estate, cars, household items and bank accounts.

The purpose of estate planning is to maximize what you’re leaving behind to your beneficiaries or heirs, which often includes minimizing taxes.

Estate planning checklist: What you need to do

1. Take inventory

The first step to crafting an estate plan is to take inventory of all of your assets, debts and other details about your estate. When you take inventory, you should try to include details like the account numbers, intended beneficiaries and the asset’s value.

Be sure to include the following in your inventory:

  • Your background information (such as your marital status) and information on the children you have (if any)
  • Family and other beneficiary information (like Social Security numbers)
  • Bank accounts
  • Brokerage accounts
  • Securities information (such as stocks and bonds)
  • Individual retirement accounts
  • Employer-sponsored retirement plans
  • Insurance
  • Real estate
  • Safe deposit boxes
  • Personal property (like cars and collectibles)
  • Unsecured debts
  • Debts owed to you
  • Business interests

2. Establish your will or trust

An important part of estate planning is writing your will — a legal document that outlines the distribution of your assets after your death. If you don’t have a will, you risk the state deciding how to distribute the assets you leave behind.

Key components of a will include:

  • Who will receive other assets that do not allow for assigned beneficiaries (such as real estate)
  • Information on how those beneficiaries will receive your assets
  • Guardians for minor children

The person who you designate to carry out the wishes outlined in your will is called the “executor.” The legal process of transferring your assets to your heirs is called “probate,” and it can be a lengthy process with various expenses like lawyer fees and court fees.

Inherited assets that are often subject to probate include real estate, cash and retirement accounts that do not have designated beneficiaries and personal property. Probate also consists of the paying of any outstanding debts that you may have left behind to creditors. Only after debts and taxes are paid can the assets be distributed to the heirs you outline in your will.

Another document you can consider adding to your estate plan is a trust, which is a legal contract through which you appoint a trustee to manage your assets through life and after death. Similar to a will, you provide instructions on how you want your estate (such as real estate, stocks and bonds) to be handled after your death.

Your trustee will have legal title to the assets included in your trust. The trustee is also in charge of making sure those assets are distributed to your beneficiaries, based on the specific instructions you provide. Some people opt for a trust over a will, as it allows them to avoid probate.

3. Designate your beneficiaries

Be sure to designate your beneficiaries on accounts that allow for them. A beneficiary is the person or entity who will receive ownership of that asset. You typically assign a beneficiary upon opening an account or signing up for an insurance policy, and will be asked to provide the name and personal information (like a Social Security number) of the beneficiary.

Beneficiary designation is often available for assets including:

  • Retirement accounts (like IRAs and 401(k) plans)
  • Life insurance policies
  • Annuities
  • Payable on Death bank accounts
  • Transfer on Death investment accounts
  • Property that has joint tenancy with rights of survivorship

With designated beneficiaries, assets are directly transferred without having to consult the written will or go through probate. By skipping the process of probate, your heir will be able to save time and money.

While you should include your beneficiaries in your will, certain financial products — like retirement plans and insurance policies — require you to assign a beneficiary on that particular account. This is important to keep up to date, because in the case that an asset in the will is named to someone different from the account’s beneficiary, the asset will go to the account’s beneficiary, as it has greater authority than the will.

While you’re reviewing and designating your beneficiaries, consider adding a contingent beneficiary — which acts as a backup beneficiary if your primary beneficiary cannot receive the benefit.

4. Consider life insurance

Another component of estate planning to consider is life insurance. When you take out a life insurance policy, you will pay a premium over the term of that policy. In the case of your death, those proceeds will then go to whoever you designate as the life insurance’s beneficiary.

There are a variety of life insurance policies — term and permanent are popular choices — which can be purchased through a broker, insurance company or through your employer.

While life insurance isn’t necessarily as mandatory as a will or trust, it is a useful tool that you should consider incorporating into your estate plan, especially if you have dependents but don’t have enough assets built up to care for them if you unexpectedly pass. Explore the life insurance policies available to you and whether they have a spot in your estate plan.

5. Establish your directives

Your estate plan should include a number of directives (in addition to your will or trust) in which you hash out how you want certain aspects of your estate handled — and by whom. When crafting your estate plan, be sure to include the following directives:

  • Advance health care directive: With this directive, you will designate a healthcare proxy to make decisions for you if you’re unable to do so yourself, as well as outline specific medical instructions if you become unable to make those decisions yourself (this is also called a living will).
  • Durable power-of-attorney for finances: This directive will allow you to designate someone to make financial decisions — like handle bill payments and pay for medical expenses — on your behalf if you’re unable to do so.

6. Plan for estate taxes

Since one of the desired outcomes of a good estate plan is to minimize estate taxes that are passed down to your heirs, planning is key. Keep in mind your estate could be subject to federal and state inheritance or estate taxes. As part of your estate planning, you’ll want to research which taxes your estate may be eligible for, and begin strategizing how to minimize them.

For example, strategies that are often used to minimize estate taxes that take advance planning include:

  • Reducing the value of your estate by making annual gifts to your children (under a certain dollar amount) or making charitable donations
  • Placing your assets in a trust
  • Buying extra life insurance policies in advance that will cover the cost of hefty estate taxes

Benefits of estate plans

Creating a solid estate plan is no easy feat — but the benefits of having one are certainly worth all of the hard work. The main benefits of estate plans include:

  • Peace of mind: You’ll know that your loved ones will be taken care of to the best of your ability, and your estate won’t end up in the state’s hands. Additionally, you’ll have plans as to what should happen to you if you become unable to make your own medical decisions — which should also provide a sense of comfort and relief.
  • Protection of privacy: Having an estate plan — as opposed to just a will — helps protect your estate’s privacy by potentially avoiding the public probate process.
  • Save on taxes and fees: With an estate plan, you should have a strategy on how to minimize estate taxes, as well as any court fees that could come up in the probate process.

Do you need an estate planning attorney?

You might need to enlist the help of an attorney — or even a tax advisor — when crafting your estate plan, especially if you have complex situations such as having a disabled child, owing estate taxes or owning your own business.

Attorneys are often touted as well worth it when it comes to estate planning, as they can help you minimize taxes and fees and help you avoid costly mistakes. An attorney will also be able to help guide you through all of the different types of legal documents that are part of a well put-together estate plan.

A solid place to start shopping for an estate planning attorney includes the American College of Trust and Estate Counsel. If you’re concerned about costs, be sure to shop around for different quotes and get multiple bids.

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Best of

Credit Unions Anyone Can Join

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Credit unions offer an alternative to doing business with banks. Instead of answering to shareholders, a credit union must act in the best interest of its members — who also happen to be its customers. By joining a credit union, you own a share in the financial institution and thus have voting rights.

Credit unions are often more exclusive than traditional banks, however, with membership eligibility often dependent on where you live or work. Still, there are many credit unions with less strict eligibility requirements, offering membership to anyone who simply joins a specified organization or charity or makes a small donation.

Credit unions anyone can join

Affinity Plus Federal Credit Union

  • How to join: Make a one-time $25 donation to Affinity Plus Foundation.
  • Learn more here

AgFed Credit Union

  • How to join: Become a member of The Friends of the National Arboretum or The Friends of the National Zoo for one-time donation of $20.
  • Learn more here

AFFCU

  • How to join: Make a one-time donation of $25 to the Airman Heritage Foundation.
  • Learn more here

Alliant Credit Union

  • How to join: Become a member of Foster Care to Success — Alliant will pay your $5 membership fee.
  • Learn more here

American Heritage Federal Credit Union

  • How to join: Become a member of the Kids-N-Hope Foundation.
  • Learn more here

America's Credit Union

  • How to join: Become a member of the Pacific Northwest Consumer Council.
  • Learn more here

Andrews Federal Credit Union

  • How to join: Become a member of the American Consumer Council. To receive a free ACC membership, use the membership code “Andrews” when signing up.
  • Learn more here

Capital Educators Federal Credit Union

  • How to join: Become a member of the Idaho CapEd Foundation for a one-time fee of $20.
  • Learn more here

Chartway Federal Credit Union

  • How to join: Make a $10 donation to Chartway Federal Credit Union’s philanthropic arm, the We Promise Foundation.
  • Learn more here

Communitywide Federal Credit Union

  • How to join: Become a member of Michiana Goodwill Boosters, Marine Corps League of St. Joseph Valley or Habitat for Humanity Helpers. Or, you can become a donor member of any one of these organizations.
  • Learn more here

Connexus Credit Union

  • How to join: Make a one-time $5 donation to Connexus Association.
  • Learn more here

Consumers Credit Union (IL)

  • How to join: Become a member of the Consumers Cooperative Association for a one-time fee of $5.
  • Learn more here

Corporate America Family Credit Union

  • How to join: Become a member of The Hope Group with a $5 membership fee.
  • Learn more here

Digital Federal Credit Union (DCU)

  • How to join: Become a member by joining an organization with member privileges, which ranges in cost from $25 to $120 and is cancellable after securing a lifelong membership at DCU. The list of participating organizations can be found here.
  • Learn more here

First Flight Federal Credit Union

  • How to join: Become a member by joining Capital Area Preservation Club, Holly Springs Arts Council or Beaufort Historical Society with a donation of $5 to $10.
  • Learn more here

Garden Savings Federal Credit Union

  • How to join: Become a member by joining American Consumer Council with an $8 donation, assuming you currently use or have used a major consumer product or service in the past 12 months.
  • Learn more here

GTE Financial

  • How to join: Become a member by joining the CU Savers club for a one-time $10 membership fee.
  • Learn more here

Hughes Federal Credit Union

  • How to join: Make a $10 donation to Friends of the Oro Valley Public Library, Friends of the Pima County Public Library, Friends of the Green Valley Library or Friends of the Kirk-Bear Canyon Library.
  • Learn more here

Lake Michigan Credit Union

  • How to join: Contribute $5 to the ALS Foundation if you live outside of the states of Michigan and Florida.
  • Learn more here

Money One Federal Credit Union

  • How to join: Become eligible by making a one-time donation (minimum $20) to Gifts for Easter Seals, though you do have to bring your donation form into a Money One location to complete your application, which makes this credit union fairly regional-specific.
  • Learn more here

NASA Federal Credit Union

  • How to join: Join through a complimentary one-year membership to the National Space Society (NSS).
  • Learn more here

Northrop Grumman Federal Credit Union

  • How to join: Gain eligibility by becoming a member of the Southern California Historical Aviation Foundation for a minimum of $60.
  • Learn more here

Northwest Federal Credit Union

  • How to join: Join by volunteering with or becoming a member of any one of Northwest Federal Credit Union’s partner organizations, which can be found here.
  • Learn more here

NuVision Federal Credit Union

  • How to join: Join the American Consumer Council with an $8 donation, assuming you currently use or have used a major consumer product or service in the past year.
  • Learn more here

Pen Air Federal Credit Union

  • How to join: Join the Friends of the Navy-Marine Corps Relief Society for $1.
  • Learn more here

PenFed Credit Union

  • How to join: Become a member of any one of Penfed’s numerous affinity partners, which include the American Society of Military Comptrollers, Coast Guard Auxiliary Association, National War College Alumni Association, Navy League of the United States and the United States Army Warrant Officers Association.
  • Learn more here

People's Trust Federal Credit Union

  • How to join: Make a $5 minimum donation to the People’s Trust Foundation.
  • Learn more here

Pinnacle Federal Credit Union

  • How to join: Become a member of the American Consumer Council — Pinnacle FCU will pay your $5 membership fee.
  • Learn more here

Premier America Credit Union

  • How to join: Qualify for membership by joining the Thousand Oaks Alliance for the Arts, which starts at $10 per month
  • Learn more here

San Diego County Credit Union

  • How to join: Become eligible by joining the Financial Fitness Association for $8.
  • Learn more here

SCE Federal Credit Union

  • How to join: Become eligible with a $10 tax-deductible donation to the credit union’s nonprofit, the Center for Financial Empowerment.
  • Learn more here

Self-Help Credit Union

  • How to join: Join the credit union’s founding charitable sponsor, the Center for Community Self-Help, for a one-time $5 fee.
  • Learn more here

South Division Credit Union

  • How to join: Join the South Division Cooperative for a one-time fee of $5.
  • Learn more here

Southeast Financial Credit Union

  • How to join: Make a $5 donation to the Autism Society of Middle Tennessee to automatically qualify for Southeast Financial FCU membership.
  • Learn more here

Spectrum Credit Union

  • How to join: Become a member by joining either the Contra Costa County Historical Society for a membership fee of $15 or the Navy League of the United States for a membership fee starting at $55.
  • Learn more here

Stanford Federal Credit Union

  • How to join: Become a member by joining the Museum of American Heritage (membership fees start at $35) or Friends of the Palo Alto Library, with membership fees starting at $10.
  • Learn more here

State Department Federal Credit Union

  • How to join: Join the American Consumer Council for a $8 fee, assuming you currently use or have used a major consumer product or service in the past 12 months.
  • Learn more here

UNIFY Financial Credit Union

  • How to join: Become a member by joining the Surfrider Foundation (with membership fees starting at $25) or the Friends of Hobbs (with membership fees starting at $10).
  • Learn more here

United States Senate Federal Credit Union

  • How to join: Contribute at least $50 to the U.S. Capitol Historical Society.
  • Learn more here

University Federal Credit Union

  • How to join: Join any one of University Federal Credit Union’s numerous partner organizations, which can be found here.
  • Learn more here

Xceed Financial Federal Credit Union

  • How to join: Join any one of Xceed’s numerous partner organizations, which include the Buffalo Zoo, Friends of the Webster Public Library, Heal The Bay, St. Joseph Catholic Church (Hawthorne) and the Seneca Park Zoo Society.
  • Learn more here

Xcel Federal Credit Union

  • How to join: Join any one of XCEL’s numerous partner organizations, which can be found here.
  • Learn more here

Frequently asked questions

A credit union is a not-for-profit financial institution that offers its members financial products, ranging from checking accounts to mortgages, depending on the credit union. Credit unions are formed by entities such as corporations and community groups, and are controlled and owned by their members.

The main difference between credit unions and banks is that credit unions are owned by their members, while banks are owned by shareholders. Additionally, banks operate as for-profit businesses, while credit unions are nonprofits. Nearly anyone can open a bank account, but you must meet certain criteria to open an account at a credit union.

One of the key benefits of credit unions is that since they are nonprofits, any revenue made by the financial institution is returned back to its members through perks such as dividends, discounted loan rates and higher interest rates.

To join a credit union, you will need to check the credit union’s membership criteria and then — if eligible — apply online, in-person or over the phone, depending on the credit union. In many cases, membership is restricted to people who live in a certain area or work for a certain employer. That being said, the list above provides you with an array of credit unions that allow you to join simply by making a small donation or joining a partner organization.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.