Photo by William Iven on Unsplash
If you believe tax rates will be higher when you retire than they are today, then a Roth IRA probably deserves some serious shelf space in your retirement portfolio.
Benefits of Roth IRAs include tax free distributions, no IRA Required Minimum Distributions, and the principal is available, tax and penalty free, at any time for any reason.
Of course, there are some limitations. Earnings must stay in until after age 59 ½ and to qualify for tax-free status the Roth IRA must meet a 5-year rule.
Another big limitation is that not everyone qualifies to contribute to a Roth IRA. To contribute to a Roth IRA, you must meet two basic tests:
First, you must have earned income equal to or greater than your IRA contribution. The IRS allows taxpayers to contribute up to 100% of earned income (income from a job or self-employment) or $6,000 ($7,000 if you are age 50 or older), whichever is less.
Even minors can contribute to Roth IRAs if they have a job or other earned income.
On top of that you can even contribute to a Roth IRA for the prior year as long as you do so before you file your taxes or April 15 whichever comes first.
Second, your income must fall within certain limits. This is the obstacle that keeps many people from starting or contributing to Roth IRAs.
Single people with Modified Adjusted Gross Incomes (MAGI) of less than $124,000 can make a full contribution to their Roth IRA. If their MAGI exceeds $139,000, they may not contribute to a Roth IRA. For those whose incomes fall between these numbers, they may do a partial contribution based on a sliding scale.
Married couples who file joint returns may contribute to Roth IRAs if their MAGI is less than $196,000. They may not contribute to a Roth IRA if their MAGI exceeds $206,000. As with single people, there is a phase out if the Adjusted Gross Income falls between $196k and $206K.
For more detailed info on the phaseouts and income limits, click here.
With a growing national debt that exceeds $27 trillion, some argue that higher tax rates in the future are a near certainty. How does a Roth IRA fit into your retirement plan?
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.