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Roth IRA Accounts

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A Roth IRA is a type of individual retirement account that you contribute to with “after-tax” dollars. Qualified withdrawals can be taken tax and penalty-free during retirement.

Who is a Roth IRA for?

Any individual with earned income and a Modified Adjusted Gross Income (MAGI) of less than $140,000 ($206,000 if married filing jointly) can contribute to a Roth IRA. However, the amount one can contribute begins to phase out at a MAGI of $125,000 ($198,000 for married filing jointly).

Examples of who meets the criteria above:

  • Freelancers
  • W-2 employees
  • Self-employed individuals 
  • Kids with earned income from lemonade stand (no age requirement)
  • Side-hustlers 

Benefits of a Roth IRA

Roth IRAs allow your contributions to grow tax-free. Since the money you put in these accounts has already been taxed, contributions can be withdrawn at any point without incurring taxes or penalties. Earnings (interest) can only be withdrawn free of taxes and penalties after 5 years from the time of your first contribution and after reaching age 59 ½. There are certain exceptions to this rule including withdrawals that are used for a first-time house purchase or costs associated with a disability.

Contribution limits

  • For 2020 and 2021, the max amount you can contribute to a Roth IRA is $6,000
  • For ages 50 and older, you can make an additional catch-up contribution of $1,000 (for a total of $7,000)
  • The contribution limit for Roth IRAs is the same as Traditional IRAs and these limits are consolidated (you can only make a combined contribution of $6,000 to both Roth IRAs and Traditional IRAs per year).

Investment options

  • You can hold essentially any financial asset other than life insurance or collectibles in a Roth IRA
  • The best types of investments to hold in a Roth IRA are ones that can enjoy the most benefit of tax-free growth. Investments that are highly appreciating, have frequent turnover (triggered short-term capital gains), or that generate a lot of taxable income (interest and dividends) are typically best suited for Roth IRAs.

When a Roth IRA is not the best option

The tax advantage of a Roth IRA is most advantageous when one is in a high tax bracket. What this means is that higher income earners get less tax benefit from contributing to Roth IRAs than those who expect to have higher income in their retirement years. For those making more money now than they expect to make in retirement, a Traditional IRA may offer more benefit since the tax deduction can be taken upfront in a year when they are in the higher tax bracket.

Is a Roth IRA right for you?

Roth IRAs are incredibly useful retirement saving tools for individuals that offer unique tax benefits as well as considerable flexibility. Contact us to find out if utilizing a Roth IRA is the right move for your personal financial situation.