The Value of a Roth IRA
The retirement account known as the Roth Individual Retirement Account (IRA) was passed by Congress in 1997. It was named after Delaware Senator William Roth who championed the idea of putting after tax money into a retirement account and not paying tax on the gain as long as you didn’t withdraw from it before age 59 ½.
Putting money into a Roth IRA is governed by limits. It is only allowed for the same amount of contribution as the traditional IRA. For 2018, that’s $5,500. You cannot contribute to both in the same tax year. Deadline for contributions is April 15th to be considered for the previous tax year.
There are also income limits as to who can participate in contributing to a Roth IRA. For 2018, phase out begins at $120,000 for single filers and $189,000 for married joint returns. After that limit increases by $10,000 you are no longer eligible for a direct contribution. There are other opportunities for higher income workers. That’s another article.
Both kinds of IRAs allow for an age 50 plus catch up contribution of $1,000 for 2018. To make any amount of contribution to these accounts you must have earned (W2 or 1099) income in the tax year of at least the contribution amount.
Compounding for many years allows for tremendous growth. 15 years or more is an excellent rule of thumb from initial contribution to first use. A single deposit of $5,500 would grow to more than $15,000 if it was experiencing a 7% average rate of return. That’s almost triple your initial investment in 15 years and no tax would be due if you were at least age 59 ½.
Roth IRAs are also a good way to transfer wealth, tax-free, to the next generation because there is no mandatory withdrawal as there is for the traditional IRA. There are mandatory withdrawals imposed on beneficiaries of a Roth IRA however, but no tax is due. The government just wants you the beneficiary to take the money out over your life expectancy and spend or save it. That way it gets back into a taxable mode.
It’s easy to open a Roth IRA. All of the popular brokers like Schwab, Fidelity, TD Ameritrade, E-Trade and Vanguard will accommodate you opening an account online. These brokers also have useful information about this kind of account. Be sure to review their summary of the rules.