What is a Roth IRA?

What is a Roth IRA?

| June 01, 2017

If you make a contribution to a traditional IRA, you might get a tax deduction, depending on your income and whether you are covered by a retirement plan at work. If you can’t get a deduction, then you might look into contributing to a Roth IRA.

You still cannot get a tax deduction for contributions to a Roth IRA, but the income taken from a Roth IRA in retirement is tax free. Whereas income taken from a traditional IRA is tax deferred and taxed when you take withdrawals. The tax free income provided by a Roth can be a big advantage, especially if you expect your taxes to be higher in the future.

The Roth IRA has the same contribution limits as a traditional IRA - $5,500 for 2017. Plus, if you’re age 50 or older, you can add an extra $1,000 for a total of $6,500.

Roth IRAs have no required minimum distributions (RMDs) at age 70 ½, yet traditional IRAs do. Unlike a traditional IRA, you can contribute to a Roth IRA after age 70½, as long as you have earned income (this means a job). Pension income, social security, dividends and interest do not count as earned income.

If you remove your own contributions (not earnings), they are not taxed and not subject to the 10% early withdrawal tax penalty. This makes sense because you do not get to deduct your contributions.

To qualify for tax-free income on the earnings, the IRA must be open at least 5 years, and you must be at least age 59½, or disabled.

Roth IRAs are a great option, but if you are in a high tax bracket, you might not be eligible to contribute to one. In this case, you would be better off using a qualified retirement plan, like a 401k, for your pre-tax dollars. Then later, if you fall into a lower tax bracket, like when you retire, a Roth may be useful.

If you would like more information about a Roth IRA and whether it may be appropriate for you, give us a call at (815) 455-6453.


The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.