Updated: Jan 4
Who doesn’t love tax free money? That’s right, legal tax free money. Is that even possible? It sure is with a Roth IRA (Individual Retirement Account). Most individuals spend the majority of their lifetime paying taxes on the money they earn. Even the interest earned in a savings account is taxed. When retired one is usually living on a fixed (and often smaller than when in their working years) income, so any money saved adds up. A Roth IRA can help.
How Does It Work
Contributions to a Roth IRA are made with after-tax dollars, so there is no deduction on the current year tax return for a contribution like with a Traditional IRA. However, what is unique is that all the earnings from interest, dividends, and capital gains are tax free when it comes time to make a withdrawal from the account in retirement. Additionally, contributions can be withdrawn from the account tax and penalty free, although any earnings may be subject to income tax and a 10% penalty if withdrawn before age 59 1/2.
Just like any other IRA, “earned income” (i.e. wages or self employment), is the only money that can be contributed to a Roth IRA.
The maximum contribution in 2021 is $6,000, or $7,000 if age 50 and up.
The account grows tax free, and after age 59 1/2, any withdrawal is tax free — if it’s been established for at least five years.
You can contribute to a Roth IRA past age 72, as long as it is with earned income.
There is no required minimum distribution (RMD) like with a Traditional IRA.
Having a retirement plan at work has no bearing on whether you can contribute to a Roth IRA.
If you earn too much income, you may be excluded from contributing to an IRA.
An Example In Savings
Say someone at age 23 opened a Roth IRA with a $300 initial deposit. They start out making just $100 a month contributions for five years, then increase it to $200 a month for the next five years. After the first 10 years they start maxing out contributions (based on the current $6,000 max rule) each year until the age of 60. If they could average a return of 8% each year, their Roth IRA would be worth over $700,000. Total contributions this 23 year old would make up to age 60 is $178,300.
That adds up to over $500,000 in tax-free gains for this particular scenario. This is of course just an example, but it illustrates that it’s never too late to start utilizing this tax-free investment and savings vehicle to help supplement retirement — what we like to call the “work optional” stage of life here at Concinnus Financial. If you would like to discuss your specific circumstances in-depth, please feel free to contact us.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.