Happy 20th Birthday, Roth IRA!
On August 5th 1997, Bill Clinton signed the Tax Relief Act of 1997 into law. This new tax law created a new type of IRA for American savers. The IRA was named after Delaware Senator William V. Roth Jr and the Roth IRA became available in January 1998.
To celebrate the Roth IRA’s birthday, let’s review some of the most common questions investors have about Roth IRA’s.
- What is the difference between a Roth IRA and Traditional IRA? A traditional IRA allows you to deduct your contribution in the year you are making the contribution. Since you receive a tax deduction on the front-end, your entire IRA account balance (principal and gains) will be taxable at applicable tax rates when you make withdrawals after age 59.5. By contrast, the Roth IRA does not provide a tax deduction in the year you make the contribution but does provide 100% tax-free withdrawals (principal and gains) after age 59.5.
- How much can you contribute to a Roth IRA? The maximum 2018 contribution is $5,500 for those under 50 and $6,500 for those over 50.
- Can everyone contribute to a Roth IRA? No, there are income limits to make a direct contribution to a Roth IRA. If you are single your ability to contribute to a Roth IRA begins to phase out at $120,000 ($189,000 if married filing jointly).
- What if I make more than the income limits above? You may still be able to benefit from the features of a Roth IRA via a Roth IRA conversion. The details of implementing this strategy can be tricky, thus consulting with your financial planner and accountant is vital to ensure it is done appropriately.
- Required Distributions: Unlike Traditional IRA’s, Roth IRA’s are not subject to required minimum distributions at age 70.5. This feature provides you with more control over withdrawals in retirement. Investors are forced to take required distributions from their IRA’s and pay taxes on those withdrawals at age 70.5 whether they need the income or not.
- Can I open a Roth IRA for my child that’s in high-school? Yes, as long as he or she has earned income. Let’s assume your child earns $2,000 over the summer mowing lawns or babysitting. You may consider contributing some or all of their earnings to a Roth IRA in their name. The growth that account could see with compound interest, tax-deferral and tax-free withdrawals over a young person’s life would be a fantastic start for their retirement savings!”
Is a Roth IRA right for you? Please contact your/a Bridgeworth advisor to determine if a Roth IRA is a good fit for your retirement plan.
Bridgeworth, LLC is a registered investment adviser.