A Roth IRA is an individual retirement account that offers tax advantages. Contributions are made with after-tax money, meaning there is no tax deduction for the current year. However, the money and earnings in the account can grow tax-free and be withdrawn without taxes or penalties after the age of 59 and a half and once the account has been open for five years. Roth IRAs are a great option for young people just starting their careers, as well as those looking to supplement their existing 401 (k) plan.
They are also a great backup emergency savings account, as contributions can be withdrawn at any age without paying taxes or a 10% penalty for early withdrawal. However, it is important to understand the tax implications before using this strategy, as a Roth conversion is permanent and cannot be transferred back to a traditional IRA. In order to contribute to a Roth IRA, you must have taxable income that year. If your income is above the phase-out range, IRS rules prohibit you from contributing to a Roth IRA.
However, there is an alternative solution called “Backdoor Roth” that will allow you to take advantage of the tax benefits of the Roth IRA. Additionally, a spousal IRA allows anyone to contribute to an IRA based on their spouse's taxable income, even if they don't have any taxable income of their own. If you plan to bank with the same institution, check if your Roth IRA includes additional banking products. Many people work with a financial advisor to optimize their retirement strategy and ensure they are making the most of their Roth IRA. If you have multiple retirement accounts, the Roth IRA may be the best option for a coronavirus-related distribution.
It is important to remember that you can only accept qualifying distributions from your Roth IRA once you have had the account for at least five years and you turn 59 and a half. If you are under the age of 59 and a half and have a Roth IRA that holds income from multiple conversions, you should track the 5-year retention period for each conversion separately.