What is a Roth IRA?

By Sunwook Jin, CFP®, CRPC®, CMFC®

The Roth IRA* (Individual Retirement Account), named after Senator William V. Roth, Jr., came into effect on January 1, 1998. A result of the Taxpayer Relief Act of 1997, the Roth IRA provides a perk which is typically not available in other form of retirement savings. If you meet the criteria and maintain the Roth IRA, all your savings will be tax-free when you or your beneficiary withdrawal from it.

Another benefit is that you can also prevent the early distribution penalties, which you would generally have to pay with another type of withdrawals from retirement accounts. To gain this reward, you don’t have the ability to deduct on your income tax when you add to the Roth IRA. Since you already paid the taxes for the money contributed to this account, you don’t have to pay any income tax at the time of withdrawal.

You must meet certain eligibility criteria in order to add to the Roth IRA. One basic condition is that you must have earned income. The gross income should be within certain limits, which will depend on your tax-filing status. There is a limit to the amount that you can contribute towards the Roth IRA. In 2018, the contribution can be either as much as $5,500 ($ 6,500 for those 50 and older) or 100% of your earned income, depending upon which is less. The time for filing the contributions is from January 1 of every year until the due date for filing taxes (not including any extensions).

Regarding distribution, the contributed money can be withdrawn from the Roth IRA anytime. As already mentioned, the cash is both tax-free and penalty-free, if the Roth IRA has been in existence for at least 5 years. The other rules include that the cash can be withdrawn after the person has attained an age of 59 1/2, or if the owner has become disabled. The named beneficiary can withdraw the money after the owner’s death.

A conversation with a financial advisor you know as well as count on could assist you to assess whether a Roth IRA is appropriate for you provided your certain tax circumstance and retirement perspective.

*The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change