The Roth Individual Retirement Account is one of many retirement accounts consumers can use to save for retirement. It offers the best tax treatment. The Roth IRA and Roth 401k were created in 1998, both named after Delaware Senator William Roth.
How Roth accounts work:
- The Funding After Tax Dollars
- Dividends, interest and capital gains are tax-free.
- The withdrawals are tax-free if certain conditions are met
The original contributions (also known as the “basis”) are always tax-free. The growth and principal are tax-free if you meet the requirements AND how not to pay the 10% penalty.
Retirement
- The account must be open for a minimum of 5 years
- You must be at least 59 1/2 years of age
First-time home buyer
- Tax-free withdrawals of up to $10,000 can be made to pay for a first home.
Tax-free withdrawals are possible for expenses related to a qualified education, birth, adoption, disability, or unreimbursed healthcare costs when an individual is unemployed.
How to fund a Roth Account:
Contribution direct to a Roth IRA of up to $6500 in 2023
- You can find out more about the income limits for Roth contributions by clicking on this link: IRS – Roth Income Limits
Direct contribution via an employer-sponsored 401k/403b plan up to a maximum of $22,500 plus $7500 (for those aged over 50)
- No income limit is required to contribute to an employer sponsored Roth.
Convert a Traditional IRA to a Roth IRA (Roth Conversion Strategy).
- It may not make sense, as some individuals may be taxed based on their total Individual Retirement Accounts.
Some employers offer a “Super Roth”, which is a Roth option that can be used by a small number of employees. The above methods are traditional ways to fund a Roth.
We always recommend that our consumers speak to one of our CFOs in order to determine if a Roth IRA or Roth 401k strategy makes sense. This could result in hundreds of thousands of dollars of tax savings both now and into the future.
