A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years. Other advantages of having a Roth IRA include:
A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future, making tax-free withdrawals even more advantageous. However, there are income limitations to open a Roth IRA, so not everyone will be eligible for this type of retirement account.
No contribution age restrictions. You can contribute at any age as long as you have a qualifying earned income.
No Required Minimum Distributions (RMDs). There are no mandatory withdrawals, allowing your savings to continue to grow even during retirement.
No income taxes for inherited Roth IRAs. If you pass your Roth IRA onto your heirs, their withdrawals will also be income tax-free.
Roth vs Traditional IRA
A key consideration is whether it makes more financial sense to take advantage of immediate tax benefits or enjoy tax-free withdrawals in retirement. With a Traditional IRA, you may get immediate tax benefits, but you’ll have to pay ordinary income tax on your contributions and earnings when you take money out in retirement. With a Roth IRA, there are no immediate tax benefits, but contributions and earnings grow tax-free. All withdrawals can be taken out tax-free and penalty-free providing you’re 59½ or older and you have met the minimum account holding period (currently five years)
Roth IRA contribution limits for 2022
$6,000 if you're under age 50
$7,000 if you're age 50 or older
A Roth IRA conversion lets you move some or all of your retirement savings from a Traditional IRA, Rollover IRA, SEP-IRA, SIMPLE IRA, or 401(k) into a Roth IRA. There are no age limits to convert, and as of January 1, 2010, the IRS eliminated Roth IRA conversion income restrictions, allowing you to start taking advantage of unique Roth IRA benefits even if your current income disqualifies you from making additional contributions after converting.
Roth IRA Conversion
Although you will have to pay current income tax on your Roth IRA conversion amount, moving your money can still be advantageous if you:
Think you'll be in the same or higher tax bracket when you withdraw.
Won't need the converted funds for at least five years.
Can pay the conversion tax in cash.
Want to leave a tax-free financial legacy to your heirs.
Does converting to a Roth IRA make sense for you? We'll walk you through the important considerations before initiating a Roth IRA conversion.