Roth IRA Basics: What Is A Roth IRA?

I started this blog with the intention of learning about money with my readers. I’m not a money expert–actually, I’m currently $37,000 in debt. My hope is that, by becoming accountable with money publicly through this blog, I can better my long-term financial position, pull myself out of debt, and begin saving for retirement. Today I spent about an hour learning about Roth IRAs from getrichslowly.com. Here’s what I learned.

What Is A Roth IRA?

An IRA is an Individual Retirement Arrangement. There are two types of IRAs, Roth IRAs and traditional IRAs.

Traditional IRA contributions are tax deductible. Roth IRA contributions are not tax-deductible, but the earnings aren’t taxed.

Even if you own multiple Roth IRA accounts, you hold only one Roth IRA overall–that is, your  Roth IRA consists of all of your individual IRA accounts. A Roth IRA is a type of account and can contain many investment types, from stocks to bonds, to real estate or certificate of deposit holdings.

Roth IRA Contribution/Income Limitations 2018

There are both income and contribution limitations for Roth IRAs. In 2018, the Roth IRA contribution limit is $5,500. If you are 50 or over, this bumps up to $6,500 per year. The income limitations are fairly generous. For single filers, phase-outs start at $120,000 and you become ineligible at $135,000. If married and filing jointly (or a qualifying widow(er)), phase-outs start at $189,000 and you become ineligible at $199,000.

Some More Facts About Roth IRAs

  • Roth IRAs are limited to earned income. If your earnings for the year don’t come from earned income, you can’t contribute to a Roth IRA.
  • Contributions can occur until the tax deadline for the year.
  • Contributions can be withdrawn at any time, but you will face taxes and a tax penalty of 10% if you withdraw your earnings before age 59 ½.
  • Earnings can’t be withdrawn until the account has aged five years. 
  • In some situations, up to $10,000 of earnings can be withdrawn (taxed but without penalty) for the purchase of your first home.
  • Reinvested dividends and interest do not count toward your yearly contribution limits.

In thinking about future investment vehicles, I think the Roth IRA might be for me. I still am not sure, though, because I usually pay taxes every year beyond my salary withholdings, so the tax benefits of a traditional IRA are enticing. Still, I like the idea of being able to grow money that will be tax-free at a later date, something the Roth IRA offers and the traditional IRA doesn’t.

That’s what I learned today. Thanks for joining me!

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