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In the world of retirement investing options, there’s one savings plan that stands out head and shoulders above the rest. It’s easy to set up, is simple to maintain, and comes with tax advantages that enable you to build wealth and increase your retirement savings for the long haul.
That’s right—I’m talking about a Roth IRA.
Maybe you’ve heard about these retirement savings accounts, but you haven’t had time to discover if it’s a good option for your retirement. Stick with me as I answer the most common questions about Roth IRA’s and show you how this mighty little savings account is designed to turbocharge your retirement savings over time.
1. What is a Roth IRA?
A Roth IRA (Individual Retirement Arrangement) is a retirement savings account that allows you to pay taxes on the money you put into it upfront.
There are two big advantages of these after-tax contributions: First, the money you invest in your Roth IRA grows tax-free. Second, you won’t owe taxes when you withdraw your money in retirement. So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when it’s time to use that money when you retire! Talk about a win!
Here are a few more details:
- Roth IRA accounts are savings accounts that you open and maintain outside of your employer retirement savings plan.
- Since Roth IRA withdrawals are tax-free in retirement, they’re a smart option for folks who expect to be in a higher tax bracket when they retire.
- You can choose beneficiaries to inherit your account, and they will be able to withdraw funds tax-free as well.
2. How is a Roth IRA different from a traditional IRA?
That’s a great question. The main difference between a Roth IRA and a traditional IRA is how they are treated for taxes. Take a look at a side-by-side comparison:
Just remember, for 2017, the total amount you can contribute to either a Roth IRA or a traditional IRA can’t be more than $5,500—or $6,500 if you’re age 50 or older.
3. Am I eligible for one?
Do you earn income? Then, yes. You’re eligible. However, you can’t contribute more than you make. So, if your 19-year-old son or daughter earned an income of $3,000 waiting tables over the summer, they can only contribute up to $3,000 to a Roth IRA. It’s also okay for you to contribute the $3,000 on their behalf.
As long as you have earned income, you can continue to contribute to a Roth IRA after age 70 1/2, the cutoff for traditional IRA contributions.
4. Are there income restrictions?
You knew there had to be a catch! According to the Internal Revenue Service, single tax filers must have a modified adjusted gross income (AGI) of less than $118,000 to contribute the maximum amount—$5,500 ($6,500 if age 50 and older)—to a Roth IRA. If your AGI is between $118,00 and $133,000, you can still contribute, but it will be a reduced amount. Married couples filing jointly must have a modified AGI of less than $186,000 to contribute the full amount. Contributions are adjusted for married couples with an AGI between $186,000 and $196,000.
If your income exceeds the eligibility limits, good for you—but bad for your ability to open a Roth IRA. You won’t be able to stash your cash in a Roth IRA, but a traditional IRA might be an option. Tax benefits for traditional IRAs have different eligibility requirements, so check with your SmartVestor Pro to see if it’s a good choice for you.
If you’re self-employed, here’s another option: Establish a Simplified Employee Pension Plan (SEP). Or, if you run a small company, consider a simple IRA that will allow you and your employees to save for retirement.
5. Can I set up a Roth IRA for my spouse who doesn’t work?
Yes. If you file a joint income tax return and have a taxable income, you can both contribute to your own separate Roth IRAs. IRS income-eligibility limits still apply. Let’s say 40-year-old John makes $150,000 and his wife, Kate, stays home with their kids. John and Kate can each contribute the max amount of $5,500 for a total of two accounts. However, if John makes $8,000 a year and contributes the max amount of $5,500, his non-working spouse can only contribute $2,500.
6. Is a Roth IRA and a Roth 401(k) the same thing?
No. But both accounts are taxed the same way. Adding the word “Roth” to the name of either savings plan means the money you contribute will be taxed upfront, grow tax-free, and be withdrawn tax-free when you retire.
Roth 401(k) plans are sponsored by employers. If you receive an employer match on your Roth 401(k), the match is not tax-favored. Meaning, the growth from your employer’s match will be taxed when you withdraw your funds in retirement.
You can contribute to both a Roth IRA and a Roth 401(k) at the same time. Remember, contribution limits will still apply to the Roth IRA.
7. How do I set up a Roth IRA?
The best way to open one is through an experienced investing professional who will meet with you face to face.
They’ll have the knowledge and experience to educate you on your new investment choices. You can invest in almost anything through your Roth IRA, but we recommend mutual funds because they have the potential to help you build wealth over time—especially with a Roth IRA’s tax benefits.
Many mutual fund companies will allow you to start a Roth IRA with as little as $50 per month, so there’s no need to put off opening your account until you have enough money to start investing.
Before you meet with your investing pro, you’ll need to gather some information and fill out the application. You’ll need the following information to open your account:
- Your driver’s license or other form of photo identification.
- Your Social Security number.
- Your bank’s routing number and your checking or savings account number.
- Your employer’s name and address.
As part of the process, you’ll also choose a beneficiary (or beneficiaries) who will inherit your Roth IRA. You’ll need their name, Social Security number and date of birth.
Next, you can make your initial deposit and/or set up automatic contributions. You can open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month to contribute. You can also do both as long as you don’t exceed the contribution limit for that year.
8. How do I maintain it?
Once you choose your mutual funds for your Roth IRA, it’s important to stick with them for the long haul. Don’t get spooked when the market ebbs and flows. The value of your Roth IRA will rise and fall with the stock market, but over its lifetime, you should see a steady growth trend. Just continue making regular contributions and stick with it despite possible market volatility.
Over 30 years, if you invest the annual max of $5,500 into a Roth IRA, it could grow to $995,000. The best part is, your contributions would only be $165,000, and the rest—$830,000—would be growth.
I’m ready to start! Now what?
Opening a Roth IRA is as easy as opening a checking account. The best way to get started is to contact your financial advisor who can guide you on the set-up process. If you don’t have a financial professional, reach out to a SmartVestor Pro in your area who is committed to educating and empowering you to make the best decisions possible for your retirement future.
About Chris Hogan
Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.
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