Types of IRA’s: Roth Explained

• Roth: unlike Traditional, uses after-tax dollars. This means you can deposit money that you have already paid taxes on; however, these contributions cannot be deducted from your income unlike Traditional contributions. The purpose of a Roth is to have any realized gains grow tax free. So if you experience exponential gains in your portfolio, and you realize those gains, you can essentially distribute those funds tax free! However, there are 2 catches to enjoy this great benefit, and both must apply. For one, you have to have the Roth open for at least 5 years. This shouldn’t be a problem; after all, retirement is decades away for most people. Secondly and more importantly, you can begin distributing funds at the age of 59 ½ or later, and unlike a Traditional, there aren’t any RMD’s, so you can take your retirement money out at your own discretion.

Traditional & Roth Contribution Limits: anyone can contribute to their own IRA so long as they have earned income. It’s important to note contributions cannot exceed one’s income. For both Traditional & Roth IRA’s, one can deposit up to $5k a year if under 50 years of age, and $6k a year if over 50. However, for a Traditional, contributions can no longer be made after 70 ½. As for a Roth, income cannot exceed a set amount required by the IRS; otherwise it will have to be converted into a Traditional as they have no income limits. Catch-Up contributions can also be made (max $1k) for both IRA’s if the maximum allowed into your IRA for the previous year was never met. Spousal contributions are also allowed, but they must meet certain requirements set by the IRS.