What is a Roth IRA? Beyond being a special kind of retirement savings magic, it’s a type of personal retirement plan that gives you multiple tax benefits, including tax-free growth and tax-free distributions during retirement.
However, not everyone qualifies to take advantage of everything Roths have to offer. That’s why we’re here to help you get up to speed on all the rules for Roth IRAs. We’ll also lay out all the Roth IRA pros and cons so you can make the most informed choice for your retirement savings goals.
How much would you like to invest?
A Roth IRA is an individual retirement account (IRA) that allows you to contribute money after taxes toward your retirement savings. By making after-tax contributions, money in your Roth will grow tax-free.
Roth IRAs work much like traditional IRAs, but there are notable differences.
With a traditional IRA, you can make contributions and potentially deduct your contributions on your annual income taxes. This classifies your traditional IRA contributions as “pre-tax.” Your Roth IRA contributions, however, are made with money you’ve already been taxed on, such as with funds that land in your bank account after payday. This classifies your Roth contributions as “after-tax.”
So, while you don’t quite see the benefits of Roth IRAs in the current tax year as you do with a traditional IRA, you’ll enjoy other long-term benefits, like tax-free growth, no-penalty withdrawal of contributions and tax-free distributions — providing you meet certain conditions.
The short version? With a Roth, you’re trading tax deductions now for tax-free income during retirement.
The benefits of Roth IRAs are pretty remarkable, including:
While Roth IRAs offer multiple benefits, they have some potential downsides:
The benefits of Roth IRAs, while notable, don’t necessarily translate into a Roth being the best choice for everyone. So how do you know if you should open a Roth IRA?
Additionally, you don’t have to choose just one type of retirement account for all your savings. For example, you may consider opening a Roth IRA after you’ve already maxed out your 401(k) contributions. Pairing a Roth IRA and a 401(k) can also offer you more tax flexibility in retirement.
If a Roth IRA doesn’t seem like the right fit , or if your income disqualifies you, don’t worry. You can still keep your retirement savings on track with other types of retirement accounts.
For those who qualify, a Roth IRA can help you enjoy a tax-free two-fer: tax-free growth and tax-free withdrawals. Before opening a Roth IRA, be sure to review the income limits to ensure you qualify. And if you need a bit of help deciding which IRA is right for you, we’ve got your back. Just use our Roth IRA vs. traditional IRA comparison guide to see how they both stack up.
There’s no limit on the number and type of IRA accounts. The annual contribution limits for all IRAs are cumulative, however. So, if you have both a traditional and Roth IRA, your annual contribution might look like contributing $2,500 to your Roth and $3,500 to your traditional IRA, for a $6,000 total in 2022.
Since you make contributions to a Roth IRA with money that’s already been taxed, you can’t deduct your contributions on your annual income taxes. So a traditional IRA might be a better choice if you need the tax deduction and still want to contribute to an IRA.
Contributing as much as possible to your retirement accounts each year is wise. However, you might have other financial priorities like paying down high-interest debt that are more pressing than maxing-out your Roth IRA. Nevertheless, no matter how much you save each year, you’re taking a step toward a financially healthy retirement.