Your Guide to Roth IRAs
How do I open a Roth IRA?
Most banks and brokerages offer Roth IRA accounts. First you need to be sure that your income qualifies you to open a Roth. Then you have to fill out the paperwork, name beneficiaries, and decide how to invest the money. The good part: You’re in charge of when to open a Roth IRA, not an employer.
When can you withdraw from a Roth IRA?
You can withdraw your contributions at any time and owe no taxes or penalties. But you can only withdraw the account’s earnings according to specific rules, with some specified exceptions, such as health insurance premiums while you are unemployed.
Are Roth IRA contributions tax deductible?
Roth IRA contributions are never tax-deductible: The essence of a Roth is that you contribute with after-tax income. However, qualified distributions from a Roth are tax-free, unlike withdrawals from a traditional IRA.
Can you have a 401(k) and a Roth IRA?
Yes, you can have both types of accounts—and it's a good way to diversify retirement savings. Just be sure that you contribute no more than the permissible limits for each account. Being able to open a Roth IRA depends on your income, but there are no income limits for having a 401k).
Can I open a Roth IRA for my child?
Yes, but only if your child has earned income. This can be from odd jobs or side gigs like selling crafts, or if your child is employed, for example, as an actor or model. If your child is a minor, it needs to be a custodial account. The decades of tax-free growth of the funds before retirement make opening a Roth IRA a really smart move and a good way to introduce your child to financial planning.
What are the downsides of a Roth IRA?
The biggest disadvantage may be that you don’t get a tax deduction for your contributions when you make them, which can be a problem if you’re close to a higher income bracket. You also are limited by the five-year rule, which makes Roth IRAs a less-desirable choice for older investors who may want to use their retirement income sooner.
Roth IRA Ordering Rules
This accounting term refers to how the money withdrawn from your Roth IRA is classified (as a contribution or earnings) and can affect whether you owe income taxes on the withdrawal.
Roth IRA RMDs
The good news for investors is that the original account owner will never be subject to required minimum distributions (RMDs) on their account. The account can grow tax-free until their death. However, their heir(s) may have to pay them, though there are special rules for spouses.
Backdoor Roth IRA
A backdoor Roth IRA is a term for a workaround that allows investors too affluent to invest in a Roth IRA to get one by moving funds first into a traditional IRA and then rolling over those funds into a Roth IRA.
Spousal Roth IRA
A spouse without a paid job can still have a Roth IRA if their spouse has earnings that will cover the Roth contribution—and if the couple files income taxes as married filing jointly and has an income that qualifies them to have Roth IRAs.
Self-Directed IRA (SDIRA)
A SDIRA is a type of Roth IRA that allows individuals to put their IRA funds iin a wider range of alternative investments than with a standard Roth—for example, real estate, private placements, and precious metals. You need to find a custodian that specializes in this type of IRA and SDIRA investors have to choose and manage the account themselves.
Roth IRA 5-Year Rule
This complicated regulation limits how soon Roth IRA investors can have tax-free access to the earnings from their accounts. Follow the rules carefully to avoid being hit by penalties and taxes on your withdrawals.
Roth IRA Conversion
If you have a traditional IRA, simplified employee pension (SEP). SIMPLE IRA or defined-contribution plan, such as a 401(k), you can convert it to a Roth IRA through this process. You will need to pay taxes on the money you convert and the rules are complicated.
Net Income Attributable
This tax accounting term is used to describe the prorated gain or loss assigned to any excess IRA contributions that are withdrawn by a taxpayer prior to filing a tax return. For example, when you overcontribute to a Roth IRA and then withdraw that money before you have to pay a penalty for it, you need to include the earnings portion of that overcontribution you remove in your tax return for that year.