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A Roth IRA’s Many Benefits

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Roth IRAs: the IRA that changed the whole retirement savings perspective.

Since the Roth IRA was introduced in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies because it offers savers so many potential advantages.

The key argument for utilizing a Roth can be summed up in a sentence: Paying taxes on your retirement contributions today may be better than paying taxes on your retirement savings tomorrow.

Here are some of the potential benefits associated with opening and contributing to a Roth IRA:

What you see is what you get. Roth IRA contributions are made with after-tax dollars, and any potential earnings on investments within a Roth IRA are not subject to income tax or included in the account owner’s income. Instead, they accumulate on a tax-deferred basis and are tax-free when withdrawn from the Roth if the distribution is qualified.

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are 59½ or older and have owned the account for at least 5 years, or if your distribution is considered qualified. Qualified withdrawals include those associated with first time home purchases, medical expenses, college tuition, disability, and birth or adoption.

You have more flexibility in accessing what you have contributed. Your contributions to a Roth IRA make up your basis. One very unique characteristic of a Roth IRA is the ability to withdraw your basis without being required to also remove growth. The benefit? Tax-free withdrawals should the account owner ever need access to emergency liquidity.

Withdrawals don’t affect taxation of Social Security benefits. If your provisional income is between $25,000 and $34,000 — or $32,000 and $44,000 for joint filers — a portion of your Social Security benefits may be taxed. Luckily, a qualified distribution from a Roth IRA doesn’t count as taxable income, which may be a means of avoiding taxation on your Social Security benefit.

You have until your tax-filing deadline to make a Roth IRA contribution for a given tax year. Normally, Roth IRA contributions can be made for the prior year until the tax filing deadline. Due to COVID-19, Roth IRA contributions for the 2019 tax year may be made up until July 15, 2020. Remember that Roth IRA contributions cannot be made by taxpayers with high incomes. In 2019, the income phase-out limit was $137,000 for single filers and $203,000 for married couples who file jointly. Above the phase-out, contributions are not permitted.

Who can open a Roth IRA? Anyone (and that includes a minor) with earned income in an amount that is under the adjusted gross income phase-out limit. Contributions are limited to the lesser of earned income or the contribution limits.

How much can you contribute to a Roth IRA annually? The combined annual contribution limit to all of your traditional and Roth IRAs is $6,000 for 2019 and 2020 ($7,000 if you’re age 50 or older).


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Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.

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