What is a Roth IRA?
Think of a Roth IRA as a special savings account just for your retirement. The IRS describes it as:
"A tax-favored account or annuity set up in the United States solely for the benefit of you and your beneficiaries."
It's designed to help you save for the future while offering some sweet tax advantages.
Who Can Open a Roth IRA?
You can contribute to a Roth IRA if you, according to the IRS, have:
"Taxable compensation and your modified adjusted gross income is within certain limitations."
There are income limits, so be sure to check the latest IRS guidelines to see if you qualify.
Roth IRA Perks
Here's what makes Roth IRAs stand out:
Tax-Free Growth: Your investments grow tax-free inside the account.
Tax-Free Withdrawals in Retirement: When you retire, you can withdraw your contributions and earnings tax-free, as long as you meet certain requirements. Now that is an awesome perk.
Contributing to a Roth IRA
While contributing to a Roth IRA has some amazing benefits, the IRS states:
"For information on contributions and the limitations, please refer to Chapter 2 of Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)."
Roth Conversions and Rollovers
According to the IRS, regardless of your adjusted gross income, you may be able to:
Convert amounts from a traditional IRA or SIMPLE IRA to a Roth IRA.
Roll over amounts from a qualified retirement plan to a Roth IRA.
Roth IRA vs. Traditional IRA
According to the IRS:
"A Roth IRA differs from a traditional IRA in that contributions aren't deductible and qualified distributions aren't included in income."
Recharacterizations
The IRS states:
"Contributions made to a Roth IRA may be able to be recharacterized as a contribution made directly to another type of IRA. However, conversions after 2017 from a traditional IRA or a traditional SIMPLE IRA to a Roth IRA may not be recharacterized. In addition, amounts rolled over after 2017 from a qualified retirement plan to a Roth IRA may not be uncharacterized."
Need More Information?
For all the nitty-gritty details, including contribution limits and eligibility requirements, check out IRS Publication 590-A. It's your go-to guide for everything Roth IRA!