When it comes time to define Roth IRA accounts it seems that a quick, dirty explanation is hard to find online. With that in mind, here is my quick synopsis of the pertinent points. A Roth IRA, or Roth Individual Retirement Account, is a retirement savings option that allows interest to accumulate without being taxed by the IRS. It is a favorable alternative to tax-deductible retirement savings plans because none of the interest is ever deducted through taxes, which allows funds to accumulate faster. The following article describes what you need to know about Roth IRA accounts, including the rules associated with deposits and withdrawals.
Deposit Rules in Roth IRA accounts
You may only deposit money into a Roth IRA account that you earned at a legitimate, registered job. The amount that you can deposit into a Roth IRA account each year depends on your yearly income and filing status. If you make less than $105,000 each year by yourself, or you make $166,000 each year with your spouse, you can deposit a maximum of five thousand dollars into your Roth IRA account per year. If you make as much as $120,000 per year by yourself, or $176,000 per year with your spouse, you are no longer eligible to deposit funds into a Roth IRA account. If your yearly income fits somewhere between these two values, the amount you are allowed to deposit into a Roth IRA account each year decreases incrementally as your yearly income increases.
Withdrawal Rules With Roth accounts
There is no restriction on withdrawal of funds that were originally entered into the account from a contribution from the owner, but withdrawing funds that accumulated in a Roth IRA account due to interest earnings is a little more complicated. Since the Roth IRA account was designed to be used as a retirement savings plan, you are not supposed to withdraw earnings until you reach the age of fifty-nine and a half years, at which point you will be free to withdraw any funds from the Roth IRA account as you see fit. If you withdraw earnings from a Roth IRA account before the age of fifty-nine and a half years, the withdrawal will be subject to both the state and federal income taxes, as well as an extra ten percent penalty.
Exceptions to the Roth IRA Withdrawal Rules
There are some specific circumstances in which you can withdraw earnings from your Roth IRA account before you reach the age of fifty-nine and a half years without the ten percent penalty. If you are buying a house for the first time, you can withdraw up to ten thousand dollars worth of earnings from your Roth IRA account without that withdrawal being subject to the ten percent penalty, and if you have had your Roth IRA account open for at least five years, you can even avoid paying taxes on the withdrawal. If you need to pay for unreimbursed medical expenses, costs associated with a disability, or medical insurance, you still have to pay taxes on earnings withdrawals, but you are exempt from the early withdrawal penalty. This is also the case if you are using the money to pay for higher education for yourself or a close family member.
Opening up a Roth IRA account is a very smart financial move for anyone who is planning for retirement. However, it is important to diversify your investments, so while you should definitely look into opening up a Roth IRA account for yourself, you should also consider some other ways to invest and save your money for retirement. So there you have it, a quick way to define Roth IRA accounts.