Roth IRAs: Good Things Come to Those Who Wait

Mack Courter |

Today, I’m going to cover the hottest vehicle for retirement saving.  It’s the Roth IRA.  Despite being around since the mid 90’s, Roth’s still confuse a lot of people.  Today, I’m going to give you what you need to know about them. 

We all know someone who it seemed would never tie the knot.  They just could never find Mr. or Mrs. Right.  Then one day, when all hope appeared lost, they found that special someone.  And we all say, “I guess good things happen to those who wait”.          

Most humans aren’t particularly good at delayed gratification.  We want the good stuff now. 

The Roth IRA is delayed gratification.  However, I assure you, it is worth the wait. 

You recall that the Traditional IRA or the other members of the tax deferred family gives you a tax deduction when you contribute money to it.  With the Roth IRA, which is in the tax free category, there is no tax deduction.  But, unlike the Traditional IRA, which when money is withdrawn is fully taxable income, the Roth is tax free.  That’s the biggest difference between the two.         

Here are 11 other facts you should know about the Roth IRA:

  1. The maximum contribution for 2014 is $5,500 if you are under age 50, and $6,500 if you are age 50 or older.
  2. You can contribute to a Roth IRA as long as your income is less than $181,000 if filing jointly and $114,000 if filing singly.  Your contribution amount cannot exceed earned income.
  3. You can withdraw your contributions at any time tax free.  So let’s say you sock $1,000 into a Roth each year and after four years you have $5,000 in the account.  $4,000 is your total contribution amount and $1,000 is earnings.  You can pull out up to $4,000 without tax consequences.
  4. You can withdraw the earnings from your Roth tax free if you have had the Roth for at least five tax years, AND it is a qualified distribution.
  5. A qualified distribution is one of the following:
    1. Made after age 59 ½. 
    2. Made by your beneficiary or estate after you die.
    3. Made by you if disabled.
    4. Made for a first time home purchase by you, your spouse, child, or grandchild. 
  6. If you take money out of your Roth IRA for any other reason, you will pay regular income taxes on the earnings, and generally a 10 percent penalty tax as well. 
  7. The penalty tax will be waived (but regular income tax assessed) on the earnings if you take money out of the Roth prior to the five year rule in certain special circumstances.   
  8. You do not have to begin taking minimum distributions upon reaching age 70 ½, unlike the Traditional IRA. 
  9. When you die, your Roth IRA passes directly to your beneficiary if it’s a person.  If you have no beneficiary, it will pass through your estate.  
  10. If the beneficiary happens to be your spouse, he or she also is not required to make minimum distributions. 
  11. All other beneficiaries however must take required minimum distributions starting in the year following the year you pass away.  The good news is that these distributions are tax free.