What is a Roth IRA and Should You Open One?
When it comes to saving for retirement there are several account options to choose from. I wanted to take a moment to focus on one of these options which is a Roth IRA.
A Roth IRA is a type of investment account that is specifically earmarked for retirement, meaning someone has full access to this account at 59 ½ penalty free. Contributions are limited to the lesser of either your earned income or $7,500 per person per year. Those who are 50 and older may qualify for an additional $1,100 catchup contribution.
There are a few different reasons why someone may want to open a Roth IRA. One of the biggest benefits this account provides is tax-free growth. Here is how this works. If you make $75,000 in a year and contribute $7,500 into a Roth account, you will still report $75,000 for income purposes. However, when you need to take money from the account, everything you contributed plus the growth comes out tax free.
Here are a few characteristics that may make sense for someone to open a Roth IRA:
- The younger someone is the better option a Roth IRA is for them. This allows the money to grow longer in the account tax free.
- A Roth is better for someone whose income is lower now than it will be in the future. You voluntarily pay taxes at a lower rate now for tax free growth in the future.
Whether a Roth IRA makes sense for you depends on your income, tax situation, retirement goals, and other factors.
If you want to know if opening a Roth IRA is right for you, have a financial advisor review your situation to see what the most tax efficient option is for you. Schedule a free consultation with our office today!