Roth IRAs are tax-favored financial vehicles that enable investors to save money for retirement. They differ from traditional IRAs in that taxpayers cannot deduct contributions made to a Roth. However, qualified Roth IRA distributions in retirement are free of federal income tax and aren’t included in a taxpayer’s gross income. That can be advantageous, especially if the account owner is in a higher tax bracket in retirement or taxes are higher in the future.
A Roth IRA is subject to the same contribution limits as a traditional IRA, the maximum combined annual contribution an individual can make to traditional and Roth IRAs is $6,500 in 2023 (an increase of $500 from 2022). Special “catch-up” contributions enable those nearing retirement (age 50 and older) to save at an accelerated rate by contributing $1,000 more than the regular annual limits.
There is no maximum age at which Roth IRA owners can contribute to a Roth as long as they have earned income, and they don’t have to begin taking mandatory distributions due to age, as they do with traditional IRAs; however, beneficiaries of Roth IRAs must take mandatory distributions.
Roth IRA withdrawals of contributions can be made at any time and for any reason. Withdrawals of contributions are tax-free and not subject to the 10% federal tax penalty for early withdrawals. In order to make a qualified tax-free and penalty-free distribution of earnings, the account must meet the five-year holding requirement and the account holder must be age 59½ or older. Otherwise, these withdrawals of earnings are subject to ordinary income tax and the 10% federal tax penalty (unless an exception applies).
Keep in mind that even though qualified Roth IRA distributions are free of federal income tax, they may be subject to state and/or local income taxes. Eligibility to make annual contributions to a Roth IRA phases out for taxpayers with higher incomes.
If you’re looking for a retirement savings vehicle with some distinct tax advantages, the Roth IRA could be appropriate for you.