Six Facts You Should Know About Roth IRAs

Roth IRAs are a great financial planning tool that may not be around forever!!! Roth IRAs are one of those rare things that sound too good be true but actually really are that good!! 

 

  1. They are extremely easy to establish, typically by completing a new account application and indicating that you want to designate it a Roth IRA.

 

  1. There are two ways to add funds to it:
    1. Contribution – which is an after tax amount that is added to your Roth IRA by writing a check. Maximum contribution for 2016 is $5,500 ($6,500 if over age 50). Must have earned income and there are phase out levels if income is too high. Contributions for the previous year can be made up until your tax return is filed.
    2. Conversion – Moving funds from a Traditional IRA to your Roth IRA. This is a taxable event so the conversion amount will be included in your gross income for the year. Great care and planning should be done to determine the conversion amount to prevent a jump to the next tax bracket. Conversions must be completed before the end of the current year.

 

  1. There typically numerous investment options within the Roth IRA to choose from. Great consideration should be given when selecting the investments. You want them to be in line with the Asset Allocation you are most comfortable with. Seek the help of a Financial Planner to determine what your specific asset allocation is.

 

  1. Withdrawals, which include contributions, conversions and earnings, can be completely tax-free if:
    1. The Roth IRA existed for a minimum of 5 years and,
    2. The account owner is at least age 59 ½ or
    3. Of the following special purposes exist
      1. Death
      2. Disability
      3. First home purchase up to $10,000
      4. Medical expenses
      5. Medical insurance premiums while unemployed
      6. Substantially equal periodic payments
      7. Higher education expenses.

 

  1. If the above requirements or special purposes are not met, withdrawals can still be taken. However, there may be taxes and a 10% penalty on the earnings. You will always receive your contributions and/or conversions tax-free; however, there may be a 10% penalty.

 

  1. Account owner is not required to make withdrawals at age 70 ½ like in Traditional IRAs.  The assets can remain in the Roth IRA as long you want.

 

Seek the help of a professional financial planner to determine if a Roth IRA is appropriate for your situation and to help you through the process.

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