What is a Roth IRA and why does it seem to be so popular? Namesake Delaware Senator William Roth helped to make the creation of a Roth IRA a reality in the late 1990s. A Roth IRA is an individual retirement arrangement (IRA) funded with after-tax dollars. What makes it so popular is that qualified withdrawals may be made tax-free. However, there are caveats and rules associated with the Roth IRA and you must understand how those rules may impact you.
First, to contribute to a Roth IRA, you must have earned income. Your contribution will not be tax deductible and you are limited by how much you may contribute. For example, in 2023, the maximum contribution amount is $6,500 if you are under 50 years old and $7,500 if you are over 50 years old. Also, if your modified adjusted gross income (MAGI) is outside a certain threshold, you may not contribute to a Roth at all.
When can you take money out of your Roth IRA? It depends on your situation. Namely, whether you are withdrawing contributions made directly to your Roth IRA or planning to withdraw from your Roth conversion.
What is a Roth conversion? A Roth conversion is the act of withdrawing money from a pre-tax account (like a traditional IRA), paying today’s tax rate on the withdrawal, and moving that money into a Roth IRA. By paying taxes now, you lock in a specific tax rate and your money grows tax-free. But you must
wait 5 years to withdraw from that account.
In my work as a financial planner, I help people determine whether contributing to a Roth IRA or initiating a Roth conversion makes sense. Since each person’s financial situation is different and there are so many rules associated with this type of account, consulting with a financial professional may prove valuable.
Wendolyn Forbes is a CERTIFIED FINANCIAL PLANNER™ with Wealth Transition Finance, A Member of Advisory Services Network, LLC, where she offers financial planning and investment management services for either a one-time or on-going cost. Wendolyn is a fee-only financial planner and member of
the National Association of Personal Financial Advisors (NAPFA). Visit her website at www.wtf-asn.com for more information.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP® (with flame design) in the US, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This material is provided as a courtesy and for educational purposes only. Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. Consult your own legal or tax
professional for information concerning your individual situation.
Originally published in the June 2023 issue of Positively Haywood.