Retirement planning can get overwhelming. Which accounts are best? Is one better than another?
Besides taking advantage of an employer-based plan such as a 401(k), which everyone should do, opening an individual retirement account (IRA) is very wise. One type of IRA stands above the rest.
The Roth IRA
This retirement savings plan is a rockstar, and the good news is most people qualify for full contributions to a Roth account. Here’s the scoop on this top retirement tool.
- A Roth account is funded with after-tax dollars which means you will never pay more taxes on any of it
- You have full access to every penny you contribute at all times — it is the most liquid of any retirement plan
- As long as you withdraw only amounts you have put in (no interest earnings), there are no penalty fees/taxes
- It’s always best to leave funds alone for the long haul so the interest will grow, but the Roth is excellent for true emergencies when you need fast money
- There are no required disbursements (withdrawals) for the Roth once you hit retirement age
- A Roth account can be willed in its entirety to family members, and they will never pay taxes on it
- You’re permitted to withdraw the entire amount at once when you retire (pay off your mortgage — travel the world — anything you want)
- My personal fave: Stay-at-home spouses are permitted to open their own account (a spousal account) and fund it with the earned income of the working spouse — this account is in their own name
- As a single person, your income can’t exceed $118,000 per year (which is most of us) if you want to put in the full allowable contribution each year
- The income cap for married couples is $186,000 per year to contribute the full allowable amount
- The 2017 IRS-approved contribution amount for the year is $5,500 ($6,500 if you’re over 50)
- That $5,500 contribution limit applies to each account holder individually (married couples can each contribute that amount)
- Roth accounts must be funded with money you have earned from employment (no passive income streams)
- Note that IRS contribution limits apply to all IRA accounts that you have ($5,500/$6,500 is the limit across the board for all of them combined)
If you don’t have your own IRA, now’s the time to jump in and start saving. It’s never too late. Consider the Roth account if you don’t want to worry about paying taxes later on.
Read my related post: Making Sense of Retirement Plans
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