Many years ago, the federal government did something amazing – they created the Roth IRA. The reason it’s so amazing is because you never pay tax on money after it’s deposited into a Roth IRA. Many people already know how great Roth IRAs are for retirement savings. However, there are important things most people don’t know about Roth IRAs. Here are my top five secrets about these accounts.
Secret No. 1: Some younger people may think they don’t want to invest in a Roth IRA because they won’t be able to access the money until retirement. Well, that’s not a concern because you can withdraw Roth IRA contributions at any time without penalty or taxes. Take note that it’s only the “contributions” that can be withdrawn without penalty. You have to leave any investment earnings in the Roth IRA until age 591⁄2.
Secret No. 2: Another reason younger folks don’t save for retirement is because they are saving for that first home. A Roth IRA is a great place to save for a down payment. In addition to withdrawing contributions, first-time homebuyers can withdraw up to $10,000 of investment earnings without penalty or taxes if the money is used to buy that first home. The one important rule is that the Roth IRA has to be open for at least 5-years for the $10,000 to be tax-free. Also, the IRS considers a “first-time home buyer” as anyone who hasn’t owned a home in the last two years.
Secret No. 3: You can only make the maximum Roth IRA contribution if your adjusted gross income (AGI) is less than $112,000 if single and $178,000 if married (these are 2013 limits). You can make a partial contribution if your AGI is less than $127,000 if single and $188,000 if married. People that make more than these limits cannot contribute to a Roth IRA. However, if you don’t have an IRA then you can do what’s called a “backdoor Roth strategy.” Make a non-deductible contribution to a traditional IRA. Wait at least 30 days and then do a Roth conversion. This only works if you don’t already have an IRA!
Secret No. 4: You can earn a tax credit of up to $1,000 for contributing $2,000 to a Roth IRA. It’s called the “saver’s credit” and it’s for low- and moderate-income workers. This credit phases out completely for singles that have an AGI of $29,500 and married couples with an AGI of $59,000. That’s pretty awesome to save $2,000 for retirement and the IRS will reduce your taxes by $1,000. It’s free money!
Secret No. 5: Roth IRAs don’t have required minimum distributions (RMDs). When you turn 70 1⁄2, the government forces you to begin withdrawing money from your 401(k)s and IRAs so the IRS can collect taxes on that money. Roth IRAs don’t have this requirement allowing the money to continue to grow tax-free.
So there you are, my top five secrets about the Roth IRA revealed! And more good news – if you want to get a jump start on your Roth IRA savings, you can still open and contribute to a Roth IRA for 2012 until April 15.
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
