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Roth IRA Explained | How to Invest in a Roth IRA for Beginners 2021

Roth IRA Explained 

To continue our series on IRAs we will be discussing the in and outs of the Roth IRA. Roth’s first came on the scene in 1997 and were named after Senator William Roth.

1. Roth IRAs are another significant savings vehicle for those that want to save money on an after-tax basis. See our video on saving on a before-tax basis here.

2. Do I make too much money? – Not everyone can contribute to a Roth IRA due to income caps. You can even have an income so high you cannot even contribute to a Roth IRA.
  • If you modified adjusted gross income is within certain income brackets, your contributions may be phased out. This means your contribution amount could be reduced.
  • Couples with a modified adjusted gross income between $196-205,999 can contribute a reduced amount. If you and your spouse have a MAGI of $206,000 or more,     you cannot contribute to a Roth IRA.
  • Since tax filers with a MAGI below $124,000 can contribute the full amount. Filers with a MAGI between $124 and $138,999 can contribute a reduced amount, and     those filers with a MAGI above $139,000 cannot contribute.

3. Contributions - Are made with after-tax dollars, which means your money can grow tax free. Distributions from a Roth IRA are also tax-free if you meet IRS guidelines.
  • You can contribute up to $6,000 for the 2021 tax season. You do not receive a tax deduction for these contributions like you would for a traditional IRA, but     distributions are tax-free.
  • A catch-up provision is in place for those 50 and older. You can contribute $1,000 more to the Roth IRA above the $6,000 annual limit.
  • Roth IRAs are also not subject to RMDs.

4. Early Withdrawals – Roth IRAs are subject to the 10% early withdrawal penalty for withdrawals made before 59 ½.
  • However, you can withdraw your contributions at any time without penalty.
  • You also must have had the Roth IRA for 5-years and be 59 ½ to withdrawal both contributions and earnings without a penalty. The distribution must take place after     age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to   state taxes.

5. How to invest and setup a Roth IRA
  • If you feel like a Roth IRA is a good retirement vehicle for you, you can open a Roth IRA account with almost any brokerage account. But they are not all the same,     some may have a different selection of funds, or charge higher than normal fees. Converting from a traditional IRA to a Roth IRA is a taxable event

If you have any questions or would like to see if a Roth IRA is the right investment vehicle for you, click the link below to schedule a free consultation with one of our  advisors.


Stephen C. Jones, AAMS, AIF, CFP®



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