A Roth IRA is a type of personal retirement account that is very much like a traditional IRA (Individual Retirement Account) but with some key differences. Most significantly, unlike a traditional IRA, contributions made to a Roth IRA are not tax-deductible. That means that you cannot take an IRA deduction on your Roth IRA to minimize your taxable income.
Even though there are not immediate tax benefits to having a Roth IRA, there are other benefits. A very significant benefit is the tax-free withdrawals that are able to be made in the future. But, to get these benefits you need to follow the Roth IRA rules.
You’re allowed to own both a traditional IRA and a Roth IRA, but the maximum IRA contribution limit is $5,000 between the two accounts. That means if you contribute $3,000 to a traditional IRA, you can only contribute $2,000 to a Roth IRA. The Internal Revenue Service (IRS) won’t allow you to contribute more than your income to a Roth IRA. If you make $3,000, you can only contribute a maximum of $3,000 to a Roth IRA.
There are no age limits on Roth IRA contributors. In addition, there is no Required Minimum Distribution (RMD). After 70 1/2, you could continue contributing to your Roth IRA and you aren’t required to withdraw any money from the account.
You are permitted to make a withdrawal from your Roth IRA, without penalty if you do so within specific guidelines set forth by the IRS. When you make a qualified IRA distribution, neither the principal deposited nor the interest earnings are taxed.
Qualified IRA distributions can be made five years after opening the account and after you’ve reached age 59 1/2. You may be able to make a qualified distribution before age 59 1/2 as long as the first contribution was made five years ago and you are making the distribution for one of these reasons: to assist with purchasing your first home, to pay for education expenses, you become disabled, you use the money for medical expenses, or you rollover the distribution into another adequate IRA plan.
If you make a withdrawal outside the guidelines listed above, it’s classified as an early withdrawal and will be subject to a 10% early withdrawal penalty as will as income taxes on the amount withdrawn.
A Roth IRA is a good choice for saving for retirement, but to get the maximum benefit from the account, you need to follow the Roth IRA rules.
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