Tax season is slowly creeping up and you have until April 18th, 2016 to contribute to your Roth IRA for the year 2015. This type of retirement account allows investors to put away $5500. Those who are over 50 years of age can contribute $6500. So what is a Roth IRA?
Roth IRAs are after taxed money that grows tax free. Once you reach the age of 59 ½ years old, you can withdraw your money tax free, including the earnings that you may have made over the years. Uncle Sam can’t touch that money since it’s already been taxed.
Roth IRAs also have the capability to offer great flexibility. It can serve as your emergency fund if you are ever in a situation. Meaning that all YOUR contributions can be withdrawn anytime, penalty free, as long as you have had the account for 5 years. For example say you contribute $5000 every year to your Roth IRA. At 5 years you will have contributed $25000. With the Roth IRA you are allowed to take all of the $25000 that you contributed, penalty free. If your account turned into $30000, you are still allowed to withdraw $25000, however if you withdraw your earnings with your contributions from your account then your money will be taxed at your regular income tax rate including a 10% penalty. There are some circumstances that the IRS allows if you don’t meet the age or holding period requirement. For example first time home buyers can withdraw a maximum of $10000 of their earnings for a down payment. Other circumstances that may allow this type of transactions are death, disability and medical bills that exceed 10% of your adjusted gross income. This is the beauty of the Roth IRA.
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*The information provided on this blog is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Please contact your financial advisor for further information.
Great post! I would add that people should consider the Traditional IRA as well. It depends on your own personal finances of course. But in general, if you made a lot of money this year, contribute to the Traditional one to take advantage of the tax savings now. If you made relatively little, contribute to the Roth to take advantage of the tax savings later when you withdraw. Either way, just save and invest!
Agreed! I will write an article on traditional soon as well. Only thing with traditional there is no tax advantage if your company offers a 401k plan already, hence the Roth though if you make too much money then the Roth would phase out and you have to contribute to traditional. Then there is the back door Roth from the traditional that I want to talk about. This helps give a general idea about the Roth IRA since I learned not that many people know of this tax advantages. 🙂 thanks for reading!
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