What Is a Roth IRA?
A Roth IRA (Individual Retirement Account) allows you to save up to a certain amount of money in a non-deductible, after-tax account. Contributions to the account are not tax-deductible, but funds grow tax-free. Any withdrawals made after age 59 ½ are tax-free. The annual contributions limit, set by the Federal government, is $6,000 for 2021 for individuals under the age of 50 and $7,000 for individuals over the age of 50.
Roth IRAs are designed for individuals who earn less than $140,000 (single) or $208,000 (married) to save for retirement. You can make contributions to the account at any age as long as you have earned income. There are no required minimum distributions as with 401(k)s and traditional IRAs.
How to Open a Roth IRA
To open a Roth IRA, look for a financial institution that has received IRS approval to offer IRAs. Examples are banks, credit unions, brokerage companies, and savings and loan associations. You can establish a Roth IRA at any time. Compare fees, and specific account requirements when selecting a Roth IRA.
Can I Take Money Out of a Roth IRA?
Funds withdrawn from the Roth IRA need to be qualified distributions. If you withdraw an amount equal to the sum you deposited, the distribution is not taxable income, so it’s not subject to a penalty. If you withdraw funds before the age of 59 ½, to be considered a qualified distribution they need to be used for the purchase of a first home, distributed to the beneficiary of the Roth IRA, or the Roth IRA holder has become disabled.
The biggest advantages are no taxes on withdrawals and being able to continue contributions while earning income.