Saving for retirement is rewarding and exciting. There are many benefits that come with setting up and contributing to a Roth IRA (individual retirement account). Roth IRAs have tax benefits including tax-free growth on your account investments. Roth IRAs are funded with after-tax dollars and the contributions are not tax-deductible but after years of contributing, the money you withdraw is tax-free.
Regular Roth IRA contributions must be made in cash, including checks, and they can’t be in the form of securities or assets. There are however, a variety of investment options within the Roth IRA once the funds are contributed including mutual funds, stocks, bonds, EFTs, CDs, and money market funds.* One benefit of a Roth IRA is that there is no required minimum distribution as there is with 401(k) and traditional IRAs.
There are restrictions on the money you can deposit to your Roth IRA. If you are working for an employer, eligible deposits will be anything that amounts to Box 1 on your W2. If you are self-employed or in a partnership, you can contribute net earnings from business, less any deduction allowed for contribution made to retirement plans on the individual’s behalf and further reduced by 50% of the individual’s self-employment taxes. You are allowed to contribute money related to divorce, alimony, child support, or in a settlement. An important factor of the Roth IRA is that there is an annual cap on the amount you can contribute to your IRA, which was $6,000 in 2020 and continuing as so in 2021, unless you are age 50 or older in which case you can deposit up to $7,000.
In order to withdraw from your Roth IRA you must have had the account for at least five years and must be at least age 59 ½ when the distribution occurs, to build or rebuild a primary home ($10,000 limit), the distribution occurs after the Roth IRA holder becomes disabled, or the assets are distributed to the beneficiary if the account holder has passed.
Follow our retirement account series to learn more about Roth IRAs, traditional IRAs, 401(k)s and more.