6 Things to Know About Roth IRA

As you plan for retirement, it is a good idea to have investment vehicles that offer a great deal of flexibility. While a 401k offers that lucrative employer match, setting up an IRA for yourself and your spouse can also provide you with many benefits down the line. Depending on the kind of IRA you set up, you will have options when it is time to take your money out.

What is an IRA?

An IRA, or individual retirement account, is an investment vehicle that you can set up for your benefit to allow investment funds to grow, untaxed, until you start taking them out after you turn 59 and 1/2. Like a 401k, if you take the money out before that age, there will likely be penalties. 

A traditional IRA uses pretax dollars, in that it allows you to deduct your contributions from your taxable income when it is time to file. When you take money out, you will need to pay taxes on the income. A Roth IRA is funded with post-tax dollars, but there is no tax to pay on the principal or the gains when you take the cash out.

Why Choose a Roth IRA?

 A Roth IRA offers the beneficiary a lot of options. You can choose from the following options:

  1. Keep contributing no matter your age. If you own a business and plan to sell it and collect payments on it as a part of your retirement income, do your best to set up your estate in such a way that your Roth funds can be passed on to your heirs without having to go through probate.
  2. Fund a Roth IRA for your spouse as a way to overcome investment limitations. If you have always worked and there was a non-earning spouse in the household caring for children, their options for building up retirement have been very limited. While they will need to set up the structure, you can fund it with joint accounts to increase their retirement earnings.
  3. Fund a Roth for your child. While the child in question must have a stated income, you can channel up to 100% of those stated earnings into a Roth IRA for your child. If they work for your business, keep their pay reasonable to avoid fuss with the IRS. Additionally, you will likely need to set up a custodial brokerage account because children cannot set those up
  4. Take money out more easily if you hit a financial crunch. According to the experts at SoFi, “once you open a Roth IRA with SoFi, you may be able to make withdrawals without paying the penalty, though you will need to pay taxes on investment gains in an early withdrawal.”
  5. Convert a traditional to a Roth. Before you start this, make sure you check all the rules and can cover all the taxes. Depending on when you do the conversion, paying estimated taxes may save you penalties.
  6. Avoid the RMD penalty. The RMD, or required minimum distribution, is different for each retiree. Because this penalty refers to a percentage of your entire retirement savings, the penalty can be punitive if you miss an RMD at around the age of 72. With IRAs in place, you have some wiggle room. Talk to your accountant and financial planner before you turn 72 to be sure.

Having some room to pivot is critical when balancing out your retirement funds. Stay on top of the maximum deposit and the minimum RMD to avoid penalties, as these rules keep changing.

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