Roth IRA Calculator
According to provided information, the Roth IRA account can accumulate $9,624 more than a regular taxable savings account by age 39.
Balance Accumulation Graph
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A Roth IRA is one type of Individual Retirement Arrangement (IRA) that provides tax-free growth and tax-free income in retirement. The major difference between Roth IRAs from traditional IRAs are that contributions to the former are not tax-deductible and contributions (not earnings) may be withdrawn tax-free at any time without penalty.
Contributions to Roth IRAs
- Made using after-tax dollars.
- Not tax-deductible. However, there is a tax credit on IRS Form 8880 that can be claimed for up to 50% on the first $2,000 in contributions, which is called the Saver's Tax Credit.
- Contributions can be withdrawn tax-free at any time without penalty. However, earnings withdrawn may be subject to tax and/or penalty before reaching age 59½ and before the account is five years old.
- Incomes above certain thresholds cannot qualify for Roth IRA contributions. For tax year 2018, this is anything above adjusted gross income of $135,000 (up from $133,000 in 2017) for filing statuses of Single or Head-of-Household. For Married-and-Filing-Jointly, this is adjusted gross income of $199,000 (up from $196,000 in 2017). Furthermore, to qualify for Roth IRA contributions, filers must have earned income (i.e. wages, tips, bonuses, self-employment income) in the year contributions are made.
- The contribution limit in 2018 for age 49 and below is $5,500. For ages 50 and above, the limit is $6,500.
- Unlike traditional IRAs, people who work past age 70 ½ can still make contributions to a Roth if the income limits are being met.
- Window of opportunity for contributions to a specific tax year is extended until April of the next year.
Distributions from Roth IRAs
- Direct contributions can be withdrawn tax-free and penalty-free anytime.
- Concerning Roth IRAs five years or older, tax-free and penalty-free withdrawal on earnings can occur after the age of 59 ½.
- Withdrawals on earnings from Roth IRAs that are less than five years old are subject to both taxes and penalties. However, given a number of situations (listed below), it is possible to avoid a penalty, but not the taxes, on accounts less than five years old as long as any one (or more) of the conditions below is met. For accounts older than five years old, these same conditions apply, and result in only a tax if none of the conditions are met, or neither a tax nor a penalty if any one of the conditions is met.
- The account holder is 59 ½ or older
- The account holder becomes disabled
- The money is being used
- for a first-time home purchase up to a $10,000 lifetime maximum
- to pay for qualified education expenses
- to pay the beneficiary after the death of the account holder
- to pay for unreimbursed medical expenses or health insurance during unemployment
- There is no required minimum distribution (RMD) as there are on traditional IRAs. Unlike Roth IRAs, traditional IRA account holders must start withdrawing at age 70 ½.
Liquidity—Common retirement plans such as 401(k)s and traditional IRAs do not allow tax-free or penalty-free withdrawals until retirement, usually decades in the future. However, because contributions to Roth IRAs are made using after-tax dollars, the contributions can be withdrawn at any time tax-free and penalty-free. Note that this is for contributions only, not any of the earnings. Due to this benefit, many account holders designate their Roth IRA accounts as emergency funds. Because withdrawal on contributions are tax-free and penalty-free, when dire situations call for it, they can take the money out. However, if the annual contribution limit is reached and an account holder decides to withdraw, they cannot re-contribute that same amount within the same tax year as a Roth IRA contribution towards retirement. Because the annual contribution limit was initially reached in that same tax year, it will be treated as a regular investment on top of and in addition to it to the fund.
Many Investment Options—Roth IRAs are available from most of the biggest, reputable financial institutions. Most, if not all investment options are only limited by what is offered through each financial institution.
No Age Limits—Traditional IRAs only allow contributions for anyone below 70 ½. Roth IRAs do not have such limits. Also, there is no required minimum distribution, so account holders can choose to start withdrawing whenever they want in retirement. These two taken together can be beneficial for high life expectancy individuals, estate-planning, or those who earn income or want to save above certain age limits. On the other end of the spectrum, there is no age limit for when to start a Roth IRA, as long as the account holder has earned income. A 5-year old who made $3,000 a tax year selling lemonade in front of her house can contribute up to $3,000 of that year's income into her Roth IRA account.
Low Contribution Limit—The annual IRA contribution limit for tax year 2018 is $5,500 for those under the age of 50, or $6,500 for those 50 and older. In comparison, the 401(k) contribution limit is $18,500 a year.
Income Limit—The income limit disallows high income earners to participate in Roth IRAs. As mentioned before, the limits are adjusted gross incomes of $135,000 for individuals, or $199,000 for married couples filing jointly. Anyone above these figures cannot contribute to Roth IRA accounts, but there is a way for these individuals to contribute to traditional IRAs initially then convert them into Roth IRAs, though things can get quite complex.
Does Not Reduce Taxable Income—Because only after-tax dollars go into Roth IRAs, there are no initial tax breaks to take advantage of. However, low- and middle-income taxpayers can use the Saver's Credit for tax savings between 10% and 50% of the first $2,000 contributed to a Roth IRA. This tax credit is non-refundable.
Minimum Holding Period—This may only apply to a minor crowd who start Roth IRAs near retirement, but tax-free withdrawals on earnings in retirement cannot be made unless funds in the account have been held for at least five years. When this period begins is largely dependent on whether the distributions are qualified or non-qualified. For qualified distributions, this period begins the first day of the first year for which Roth IRAs were funded. For non-qualified distributions, there are separate five-year periods for each Roth IRA conversion. Each begins the first day of the year when the conversion is made.