If you have typed your questions about Roth IRA retirement plans into Google, you have most likely come across articles from the IRS that detail the retirement plans in ways that aren't exactly reader friendly.
Sometimes, the easiest way to understand Roth IRA retirement plans is to have a question and answer session with a knowledgeable source. Consider this blog post one of those “conversations.”
Here are four frequently asked Roth IRA questions and answers.
1. What is a Roth IRA?
To start, let’s answer the most basic question: A Roth IRA is an individual retirement account that is generally not taxed upon distribution. The most significant advantage to a Roth IRA compared to other retirement plans is that qualified withdrawals (or withdrawals taken out after the age of 59½ are tax free and the growth within the account is tax free as well. However, tax savings for contributions to the retirement plan is not granted as it is with other retirement plans.
The annual maximum amount that can be contributed to a Roth IRA changes every few years. Between 2019-2022, the maximum contributions are as follows:
- $6,000 for ages 49 and below
- $7,000 for ages 50 and above
Another benefit of a Roth IRA is that it doesn’t come with required minimum distributions. Once you have reached retirement age and don’t need the money right away, the money can stay in the account and grow.
2. How is a Roth IRA different from a traditional IRA?
The biggest difference between a Roth IRA and traditional IRA is the tax involvement during the withdrawal process, which can begin after the age of 59 and a half. As mentioned, Roth IRA withdrawals are tax free. With a traditional IRA, withdrawals are taxed as current income.
In other words, contributors with a Roth IRA can enjoy tax-free withdrawals in the future, and contributors with a traditional IRA can take advantage of tax benefits today.
If you expect to be in a higher tax bracket when you begin withdrawing, a Roth IRA is the best option. However, if you expect to remain in the same tax bracket as the one you are currently in, a traditional IRA may be your best option.
Keep in mind that you can contribute to both types of IRAs in the same year if you qualify for both. In fact, this is a great option because it allows you to diversify your investments. The combined annual IRA contribution limits for the year still apply, so be sure to make note of these limits prior to making a decision.
3. Am I eligible to contribute to a Roth IRA?
Anyone who has an earned income is eligible for a Roth IRA, as long as their income for a given year falls within a range. The IRS adjusts this income range periodically. In 2022, modified adjusted gross income must be:
- $144,000 for single taxpayers and heads of household
- $214,000 for married, filing jointly
On the other hand, you cannot contribute more to your IRA than your earned income for the year. Those who do not make any income are ineligible to contribute to a Roth IRA account.
4. What happens if I’m not eligible to contribute to a Roth IRA?
If you’re not eligible to contribute to a Roth IRA, you’re not out of options. In fact, your options vary and might include:
- Workplace Roth 401(k)s: This type of retirement plan is not subject to income restrictions and works a lot like the Roth IRA. Contributions are taken from your paycheck after you’ve paid taxes. Withdrawals in retirement are not taxed.
- Roth conversions: Also known as the backdoor Roth IRA, a conversion allows you to turn a traditional IRA into a Roth by moving the money from one account to the new Roth account.
Plan Your Future with the Help of a Retirement Calculator
As you save for retirement, knowing how much you should be saving, how much you plan to make over time, and other important factors can be a challenge. You can organize all of this information by using a retirement calculator.
Give ours a shot, and if we can answer any Roth IRA questions that might not have been covered in this blog post, don’t hesitate to give us a call.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.
About the Author
Executive Vice President, Director of Trust and Wealth Management
Lory manages the Trust and Investment Management Services division to help coordinate the diverse services provided. She has been involved in banking and finance since 1990. Her management and operations experience gives her the resources necessary to lead a team of professionals offering banking and trust products and services with a high degree of personal attention.
She is a graduate of the Florida Bankers Association’s Graduate School of Banking, Florida Bankers Association’s Trust School, and Leadership Charlotte Class of 2003. In addition, Lory has earned both the Florida Certification and National Certified Guardian designations. She serves on the Executive Committee of the Florida Bankers Association’s Trust and Wealth Management Division, volunteers with Tidewell Hospice and has served as a member of the Board of Directors of United Way of Charlotte County.