The Basics of a Roth IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account funded with your post-tax income. A Roth IRA does not have up front tax deductions for contributions. Your initial contributions can be withdrawn at any age, any time, tax-and-penalty free. However, any earnings that you make from your Roth IRA may be charged taxes and a penalty when making early withdrawals (before the age of 59 1/2) unless it qualifies as a qualified distribution. This essentially makes Roth IRA accounts ideal for retirement planning and growing your money over the long term.

what is a roth ira

Rules of a Roth IRA

Earnings can normally be withdrawn without penalties after age 59 1/2, if you opened the account and made contributions to the account within 5 years. Following the guidelines will avoid penalties (not taxes) on earnings if you need to make an early withdrawal.

The IRS uses the terms “qualified” and “non-qualified” when determining tax-free and penalty-free early withdrawals on earnings or interest earned with the Roth IRA.

For a qualified distribution, your Roth IRA account must be open for at least five years before your withdrawal and must meet one of the following conditions:

  • You are 59 1/2 or older
  • You are buying your first home – You can withdrawal of up to $10,000 maximum to buy, build or rebuild your qualified first home. See how much your home is worth.
  • You become completely disabled
  • You are the beneficiary holder of a Roth IRA

Non-qualified distributions on earnings will be subject to taxation and a 10% penalty tax unless an exception applies. The following are some exceptions:

  • Using the withdrawal to pay for qualified education expenses
  • Covering medical bills – qualifying medical expenses exceeding 7.5% of your adjusted gross income. This percentage will be 10% as of January 2019.
  • Continuing health coverage – If you lose your health coverage due to unemployment
  • Active duty – If serving on active duty for 180 days or more the penalty can be waived
  • Unpaid tax bills- The IRS can collect money from your retirement account but, will not charge an early withdrawal penalty for doing so

How Does it Cost to Start a Roth IRA?

There is no minimum amount to start a Roth IRA. However, you will need to cover the investments you are buying. Roth’s do have limits when it comes to how much you can contribute. If you are under 50 years old, your contributions cannot exceed $5,500 annually. If you are 50 years or older that number is set at $6,500 annually.

You are still able to open more than just one Roth IRA account. You will still have to adhere to the maximum contribution amount over all accounts at $5,500 if you are under 50 and $6,500 for 50 years and older.

How to open a Roth IRA account?

If you make more than $199,000 a year filing jointly or $135,000 filing single you may not be eligible to contribute to a Roth IRA. Here are the current limits of income of those who can qualify for a Roth IRA account:

roth ira contributions limits

If you qualify to open a Roth IRA, there are tons of options for ways to open an account. Most banks, investment companies, and financial advisors offer options to open a Roth IRA account. Some of our top recommendation options are as follows:

roth ira - ally investAlly Invest’s no annual fee, low commissions, and no account minimum make it a good choice for investors holding an IRA. For investors that remain active, Ally offers a solid set of tools. However, IRA customers might be put off by transfer-out and closure fees.

E-Trade‘s IRA offering offers a lot for retirement investors to love, including a sizable line-up of no-trading-fee mutual funds, along with an extensive list of retirement advice and tools. No minimum account balance required.

TD Ameritrade accounts require no minimum investment and offers some standout features, including extensive (and free) research tools, quality customer support and portfolio-building guidance.

Charles Schwab is the broker for investors of all walks. Beginners will find the vital information needed to navigate the world of investing, while sophisticated tools (including two strong trading platforms) will appeal to active traders.

To read more detail regarding Roth IRA accounts, visit IRS.gov.

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