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What Is a Roth IRA?

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What Is a Roth IRA?


Nick M.-

A Roth IRA is the second most popular IRA savings account.

There are two main characteristics of this account:

  • The money you put into the Roth IRA account are after-tax dollars, meaning you have already paid taxes on the contributions that go into this account.
  • Since you have already paid taxes on the contributions, you will not be able to get a tax deduction for contributing into this account.

So, what makes the Roth IRA account so special?

The Roth IRA account is so special because it allows all of your contributions into the account to grow tax free including any distributions that it may have.

Hopefully this account will grow and when the time comes for retirement, you will not be required to pay taxes from all of the withdrawals you take from the account. With the Traditional IRA your withdrawals will be taxed as regular income.

Another great feature of the Roth IRA account is that you may be able to take early distributions from the account, of course as long as it is only the principal excluding the distributions, without being penalized.

Roth IRA on a road sign

Is there a downside to the Roth IRA?

The main problem with Roth accounts is that people who earn over a certain amount will be prevented from contributing directly into a Roth IRA account under regular ways. This happens because once you’ve reached a certain amount of income, you will enter a “phase out” where you will not be able to make a full direct contribution into the Roth IRA but rather a partial “direct” contribution and a partial “back door contribution”.

For example for 2019, you will be able to make a full direct contribution of $6,000 when your income is below $122k for single and 193k for married couples. After that amount and up to $137k for single and $203k for married couples you will be ineligible to contribute into the Roth IRA unless you first contribute to a Traditional IRA and then roll over that contribution to a Roth or “a back-door Roth conversion” into the Roth IRA account.

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