Roth IRAs are such a fantastic way to save for and prioritize your retirement, but so many individuals don’t know enough about them. Below, we’ve recapped the most frequently asked questions we’ve gotten about these accounts so that you can feel informed and knowledgeable about these great retirement options once and for all:
What exactly is a Roth IRA?
A Roth IRA is a type of individual retirement account that you can open yourself. Any money that you contribute is taxed on the way in so that you don’t have to pay taxes at retirement age when you take the money out.
Who can contribute to one?
Roth IRAs are income restricted so you must make below a certain threshold to contribute. For 2023, single individuals can contribute if they make less than $153,000. Those filing taxes jointly must make less than $228,000 (combined).
How much can I contribute?
Each year you are permitted to contribute up to $6,500 ($7,500 if you’re 50 or older). You typically can contribute for the full tax year up until the tax deadline for that year. So for 2023, you can contribute any amount to your Roth by April 2024.
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What happens if I don’t qualify?
Open up a Traditional IRA instead! A Traditional IRA is just like a Roth IRA except the money you contribute doesn’t get taxed on the way in. Instead, you’ll pay taxes on the money when you withdraw it during retirement. Anyone can open a Traditional IRA.
How should I invest the funds?
Decide your risk tolerance/comfort level and invest according to your retirement goals.
We recommend keeping costs low by using index funds or ETFs that are designed to mirror the stock market and achieve diversification.
How is a Roth 401(k) different?
A Roth 401(k) is an employer-sponsored plan and does not restrict your eligibility based on income. You can contribute up to $22,500/year in this account and all money that is contributed is taxed on the way in. Same great benefits of a Roth IRA.
What is a “backdoor” IRA?
A “backdoor” Roth IRA is when you convert a portion (or all) of your Traditional IRA into a Roth IRA. Any money you transfer to a Roth will have to be taxed at your income tax rate, but you can do it. This is a smart way to get around the income limits of a Roth.
Can I take out my contributions?
You can take out your contributions tax-free and penalty-free anytime. You can only take out the earnings on the account without paying taxes (or paying a penalty) if you’re over 59.5 and have had the account open for at least 5 years. There are some exceptions to know:
If you are under 59.5 but have had the account open at least 5 years, you can withdraw your earnings if:
- you use the funds (max: $10k) towards a first home purchase
- you become disabled or pass away
- for qualified birth/adoption expenses or health insurance if unemployed
- you use it for qualified educational expenses
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What should I fund first: 401(k) or Roth?
This is up to you but we always recommend contributing at least enough to your 401(k) to get the employer match. Then, if you are eligible to open a Roth, we suggest opening one and contributing to it while you qualify.
How can I open one?
Step 1: Gather your info
- Bank account info, routing #, your SSN, etc.
Step 2: Choose an advisor or financial institution
- Go to their webpage and do some research on their fees/approach
Step 3: Create account
- Create account and enter your info so money can be transferred
Step 4: Choose your investments
- Work with an advisor or hand-select your choices yourself
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