If you’re looking for an investment option that can help you grow your retirement savings tax-free, a Roth IRA could be the perfect solution.
This individual retirement account can be used for so much more than just retirement savings, and it’s important to understand the unique features of a Roth IRA before investing.
In this article, we’ll unpack five of the most interesting facts about Roth IRAs that you may not know.
1: You Can Withdraw Contributions Tax-Free and Penalty-Free Before Age 59 ½
Did you know that you can withdraw the contributions you’ve made to your Roth IRA tax-free and penalty-free before you turn 59 ½?
That’s right – if you’ve already paid taxes on the money you’ve contributed to your Roth IRA, you can withdraw that money at any time without incurring penalties or taxes.
This makes the Roth IRA a highly flexible investment option that you can use for short-term and long-term savings goals.
2: Roth IRAs Have No Required Minimum Distributions
Unlike traditional IRAs and 401(k)s, Roth IRAs have no required minimum distributions (RMDs). This means that you can continue to invest in your Roth IRA well into your 70s and beyond if you choose.
Since all the money you contribute to a Roth IRA has already been taxed, you won’t have to pay any additional taxes on your withdrawals during retirement.
3: There Are Contribution Limits for Roth IRAs
While Roth IRAs offer a great deal of flexibility, there are limits to how much you can contribute each year.
The contribution limit changes each year, so be sure to check the current limit before making contributions.
For example, in 2021, the contribution limit for Roth IRAs is $6,000 for individuals under age 50 and $7,000 for those aged 50 and over.
4: Contributions and Earnings Are Treated Differently
It’s important to understand the difference between contributions and earnings in your Roth IRA. Contributions are the money you put into your account, and earnings are the money your investments earn over time.
While you can withdraw your contributions tax-free and penalty-free at any time, you’ll be subject to taxes and penalties if you withdraw your earnings before age 59 ½.
5: Roth IRAs Offer a Wide Range of Investment Options
Roth IRAs offer a wide range of investment options, including stocks, ETFs, and mutual funds.
While it’s important to choose investments that align with your risk tolerance and investment goals, you can also diversify your portfolio to minimize risk.