Roth IRA Basics to Get You Started

Written By Mary Beth Eastman
Last updated February 4, 2020

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December 25, 2018

Simple. Thrifty. Living.

As you’ve likely heard many times, it’s never too late to start saving for your retirement. In fact, with old-fashioned pension systems quickly going extinct, and Social Security seemingly in a perpetual state of flux, it’s more important than ever to take the proverbial bull by the horns.

That leaves an individual the sometimes confusing task of choosing the retirement savings path most appropriate for them. While employer-sponsored plans, when available, should almost always be a part of a retirement savings strategy, a Roth IRA can also pay significant dividends — both literally and figuratively — to a person’s retirement goals.

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The Roth IRA is a specific type of tax-qualified account that can provide unique tax benefits to those that qualify. Unlike a 401(k) at work or a traditional IRA, a Roth IRA does not offer any immediate tax benefits on contributions. Also, when considering 401(k) vs. IRA, employer matching contributions may be a factor. However, since account owners pay all taxes up front, distributions are taken tax-free – including all accumulated growth – as long as an individual follows certain distribution provisions.

Given the fluid nature of our tax code, it is always advisable to check the current tax years rules and regulations to make sure you have the most recent information available. That said, as of tax year 2018, some of the basic Roth IRA guidelines are as follows:

  • 2018 contribution limits are $5500 or, if age 50 or older, $6500
  • modified adjusted gross income must be less than $120,000 of single, $189,000 if married and filing jointly
  • As of age 59 1/2, owners can take distributions free of taxes and penalties
  • While the IRS permits certain penalty-free distributions before 59 1/2, individuals can always withdraw contributions without tax or penalty
  • Early distributions on growth, however, are subject to a 10% penalty

Of course, like most retirement saving options, choosing the right type of tax-advantaged account is only the first step. Just as importantly, an individual must choose the most suitable of investment or cash-based instrument to drive the account. This choice could include stocks and bonds – typically by way of mutual funds – money market accounts, certificates of deposit, or virtually any other type of investment.

In other words, like most aspects of investing, a person must adhere to their own level of risk tolerance and be mindful of their goals when choosing what to use within a Roth IRA. When used intelligently and appropriately, a Roth IRA can be a powerful tool in allowing an individual to reach the retirement goals. Choose the best online IRA to make the most of your decision.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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