Roth IRAs are an individual retirement account (IRA) that allows tax-free withdrawals under specific conditions. They are similar to Traditional IRAs, although they are distinguished by how they are taxed; tax dollars fund these retirement accounts, and contributions are not tax-deductible. Deductions, however, are tax-free.
Still, there’s much to learn about how these individual retirement accounts work—and how they do not. Because of their prominence, we want to take the time to dispel some common misconceptions about how they function, as well as how they do not.
This is one of the most common questions we get at villaNova Insurance Partners. Traditional IRA contributions can come with a 10% penalty if you withdraw funds before this age. Not only that but this penalty applies in addition to required income taxes on the total distribution amount. This gives some younger clients pause, as they are reluctant to keep these funds out of reach for what they often feel is such a long time.
However, Roth IRAs are different. You may withdraw funds—up to your total contribution—without paying penalties or taxes and can do so at any point. This is because the IRS says that, because your contributions have already been taxed, no taxes for withdrawal apply. Keep in mind, however, that all withdrawals of non-qualified distribution of earnings or interest will be taxed as ordinary income on top of a 10% penalty.
This is another common concern we hear from both individuals and married couples alike. There are income level caps you should be aware of, but these apply only to upper earners. Married couples filing jointly are capped at $188,000, while individuals are capped at $127,000.
While there are a number of factors that can make this true, there are ways to still benefit. If you or your spouse participant in, say, a 401(k) and Traditional IRA, you can participate with a Roth IRA conversion strategy. Ask us how we can help you do this. While it’s not a straight forward process, we can help make it happen.
While Traditional IRAs come with “forced withdrawals” at age 70.5, Roth IRAs do not come with such rules—sort of. Original account holders are not subjected to Required Minimum Distributions (RMDs) at any point. RMDs are determined based on the account holder’s life expectancy, steadily increase with each year, and are taxed with ordinary income.
While this is great news for the account holder, any non-spouse beneficiaries will be subjected to RMDs. Usually, beneficiaries are required to begin withdrawing the year after the account holder’s passing. If they do not, they must withdraw the full amount no later than five years after their death.
We know that navigating the complexities of Roth IRAs can be intimidating. That’s why we’re here to help you make sense of each consideration so you can plan for the life you want. Contact us today to learn how we can help you begin planning or your future.