A Roth IRA is a retirement account funded by a taxpayer using his or her post tax-income. The plan has several similarities to the traditional IRA. In the traditional IRA, contributions are made with pre-tax dollars which means an individual will pay income-tax when they withdraw the money from the account during retirement.
When it comes to Roth-IRA, the account is funded using post income-tax and during withdrawal, the contributions are not tax-deductible. The contributions made from your after-tax dollars into a retirement account consists of your funds which means an individual can tap into their contributions at any time, tax-free and penalty-free.
A Roth-IRA is a beneficial scheme for lower income employees who will not miss the post income tax-deduction and will gain from years of tax-free compounded growth. It also appeals to an individual who wants to lower their tax-bite in retirement as well as to older wealthier tax-payers who desire to bequeath their wealth to heirs, tax-free.
One thing you need to know is, you can contribute to the plan at any age as along as one is earning a salary from a job for example from child actors to super store greeters.
How Roth-IRA was Established
The retirement account is named after the Delaware Senator William Roth and it was established by the Taxpayer Relief Act of 1997, which is the largest tax-deduction act in US history.
It was formulated to reduce tax-rates and offered new credits for citizens across the board. The law was introduced under the Child Tax-Credit which raised the unified credit limit and exclusion from the sale of personal property.
It was signed off by President Clinton on August 5th, 1997 which also created a $ 1.3 million exclusion for farms and small businesses. After the sign off, the act was widely applauded by the American public and since then, it has provided billions of dollars in relief for personal and business tax-payers.
It is part of the qualified retirement plan which means employees are allowed to defer a portion of their earnings into the plan plus reducing employees’ present income-tax liability by reducing taxable income. As a result, employers are able to attract and retain good employees.
Who qualifies for Roth-IRA?
One thing you ought to know is the retirement account has earnings eligibility limits which mean if you take too much money, you are not able to contribute to the plan.
In case your earnings are higher, it is advisable to change some of or all of your traditional-IRA to a Roth-IRA. This means that you will pay taxes on the entire amount and in the end, you will get to gain from the plan.
As an American, you are eligible to contribute the maximum $5,500 or $6,500 if you are 50 years or older by the end of the year. This applies to individuals who are single and have a modified adjusted gross income less than $118,000.
For couples who are married, they can contribute the maximum amount if their modified adjusted gross earnings are less than $186,000.
Roth IRA Benefits
It offers flexibility to the individual because one can withdraw contributions at any moment without taxes or penalty.b. There are no mandatory withdrawals because account holders are not forced to withdraw money. This has been found to be useful especially when it comes to estate planning purposes.
Individuals are able to save during retirement. This is because people make contributions to the retirement account especially if they are working past retirement age and stay within the earnings limits.
With a Roth-IRA, you can secure yourself financially especially if you will be working past the retirement age. The plan allows you to make contributions if you continue to work past the retirement age unlike the Traditional-IRA which does not allow contributions after 70 ½ years.
Furthermore, when it comes to withdrawal, the contributions are available tax-free and penalty-free.