5 Important Facts about the Roth IRA that May Surprise You

 

 

There are abundant misconceptions as to how Roth IRA accounts work. Understanding all of the rules that govern your Roth IRA is very important. Here are 5 Roth IRA facts that might surprise you:

 

1. There is no age limit for contributions. Unlike the Traditional IRA, which limits contributions once you reach the year you turn 70 ½, If you have earned income and your modified adjusted gross income ( MAGI) is below a certain level, you can contribute to a Roth IRA. Your age is not a factor. This often comes as a surprise to taxpayers.  Roth IRAs are different. Age is never a barrier to making tax year contributions.

 

2. Participating in an employer plan does not prevent you from making a Roth IRA contribution. Do you have a 401(k) at work? That’s Great! Your employer plan will not make you ineligible to contribute to a Roth IRA. In fact, you can max out both. But what if your employer plan is a Roth 401(k) plan? Not a problem. You can fully fund a Roth 401(k) and a Roth IRA for the same year.

 

3. You can always access your contributions tax and penalty free.

Are you avoiding contributing to a Roth IRA because you are worried you might need that money? Don’t let this fear stop you from making that Roth IRA contribution. Your tax year Roth IRA contributions are always available to you tax and penalty free regardless of your age and what you intend to do with the money. More good news is that the rules for Roth IRA distributions are very taxpayer friendly. Your contributions are not only always accessible tax and penalty free, they are also considered to be the first money distributed from your Roth IRA.

 

4. You don’t ever have to take distributions from your Roth IRA, but your beneficiaries do. During your lifetime, distributions are never required from your Roth IRA. Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to traditional IRAs while you are alive. Your money can grow tax-free for your entire lifetime. Your beneficiaries will have to take RMDs from the inherited Roth IRA. That is the bad news. However, the good news is that these distributions will almost always be tax and penalty free.

 

 

5. Almost anyone with a traditional IRA can convert it to a Roth IRA.

Prior to 2010, there were restrictions on conversions due to income or filing status. The changes that came in 2010 opened the door to conversion for almost any taxpayer who owns a traditional IRA. The only exception would be traditional IRA beneficiaries. Unfortunately, conversion is not available for those beneficiaries.

If you haven’t converted, this might be the year for you to make that move. You will want to discuss your situation with a knowledgeable tax or financial advisor. Just because everyone with a traditional IRA can convert, does not mean that they should. Conversion is not one size fits all.

 

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