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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. A Roth IRA is one of the most popular ways for individuals to save for retirement, and it offers some big tax advantages, including the ability to withdraw your money tax-free in retirement. In fact, many experts consider the Roth IRA available. Here’s how the Roth IRA works, what it offers and how it compares to a traditional IRA. If you already know you want a Roth IRA, . Or you can skip right to The Roth IRA offers big tax advantages
Like its cousin the , a Roth IRA offers individuals an opportunity to save for retirement on a tax-advantaged basis. With a Roth IRA, you can deposit after-tax money, grow that money, and then take it out at retirement (age 59 ½ or older) tax-free forever. The whole “tax-free forever” part? That’s what turns heads, but the Roth IRA offers other perks. Its tax-free nature makes the Roth IRA especially attractive , since it can save the inheritors significant taxes. Plus, you’re never too old to invest in a Roth IRA, so you can stash money there your whole life, as long as you qualify (see below). The Roth IRA is flexible. You can withdraw contributions any time tax-free (since you’ve already paid taxes on them), and you can use the money for any reason. But experts warn against this. If you take out earnings early, though, you can be hit with taxes on the gains and a bonus penalty of 10 percent on the earnings. However, certain uses — such as for qualified educational expenses — can help you avoid the bonus penalty. On top of all this, the Roth IRA allows you to invest in such as stocks and stock funds, where you could earn much more than in a traditional bank account. What are the other rules for the Roth IRA
You can withdraw any contributions and earnings tax-free at retirement, with only one stipulation: five years must have elapsed since your first contribution to a Roth IRA, and the clock starts on January 1 of the year you made it. , and it means that you need to open a Roth IRA earlier and plan a bit ahead. In 2022, you’re allowed to contribute up to $6,000 annually to your Roth IRA. If you’re 50 years of age or older, you can make an of $1,000 each year. The Roth IRA is also a great rollover option if you have a as a retirement account. You can roll the money from the employer-sponsored account, which has a required minimum distribution in retirement, to the Roth IRA, . That rule means you could continue to amass even more tax-free money inside your Roth IRA. Who can open a Roth IRA
In general, anyone with earned income () in a given year can contribute to a Roth IRA. You can add up to the lesser of the maximum annual contribution or your earnings. There is an exception, however, and it’s called the . If your spouse earns money, you and your spouse are each able to contribute up to the maximum contribution or your total annual income, whichever is less. In addition, the Roth IRA places income limits on who can contribute directly, though you have ways around that. The limits for 2022 include: If you’re an individual filer, you can contribute the maximum amount if your modified adjusted gross income is under $129,000. The limit is reduced and phases out up to income of $144,000. If you’re married filing jointly, you can contribute the maximum amount if your modified adjusted gross income stays below $204,000. The limit is reduced and phases out up to income of $214,000. If you make above those amounts, you can still open a Roth IRA, but the route is a bit more roundabout using what’s called a backdoor Roth IRA. The short of it is that you can open a traditional IRA and then convert the account to a Roth, . Roth IRA vs traditional IRA
The other main kind of individual retirement account is the traditional IRA, and that can be a valuable savings vehicle for retirement, too. In contrast to the Roth IRA, the traditional IRA allows you to make contributions on a pre-tax basis, meaning you get a tax break this year on what you put in. At retirement (age 59 ½ or older), . The , so that if you make too much you won’t be able to use pre-tax money to do so. But you can convert the account to a Roth IRA and get the Roth’s tax advantage that way. The traditional IRA has required minimum distributions in retirement. Those are a few of the key differences between the two IRAs – . Bottom line
Because of its ability to shield taxes on earnings forever, the Roth IRA is one of the most popular retirement savings options. But don’t overlook the Roth IRA’s other valuable features, including no required minimum distributions and attractive . SHARE: Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles