A 19-year-old who began contributing $1,500 to such an account could expect to have some $608,000 by age 65, given 7 percent average annual earnings. That’s a healthy bit of money to support one’s post-employment years.
Of course, not every Roth IRA holder leaves his savings to accumulate that much retirement income, but the prospect of being able to make a large purchase (a down payment on a home, perhaps?) is also enticing.
Money goes into a Roth IRA and accrues interest completely tax free until it can be withdrawn, usually after the holder is age 59½ or older. Studies show that a Roth IRA usually is started by someone 18 to 39. There is no minimum age requirement so young people who have earned income are eligible.
The Roth IRA is one of few savings methods that allow putting after-tax money into an account and withdrawing it tax-free. So, if you began contributing the $5,500 allowable deposit this year, and maintained that level for 25 years at a 3 percent return, you’d accumulate $200,525, with $63,025 in tax-free earnings.
While the original idea behind IRAs was to build retirement security, this method of savings now is used by many individuals to put money aside for purchasing a home or paying for advanced education.
A Roth IRA involves income limits. Single individuals can contribute if their modified adjusted gross income is less than $129,000. The contributions phase out as modified adjusted gross income reaches $114,000. For couples, the limits run from $181,000 to $191,000 filing jointly.
Your Roth IRA contributions are not tax deductible, but the earnings grow tax-free. You don’t pay taxes when you withdraw from your account if it has been growing for at least five years.
Withdrawals usually begin at 59 ½ , when you become disabled or die (in which case the money goes to a beneficiary), or if you are purchasing a first-time home, which allows a $10,000 one-time withdrawal.
Traditional IRAs require that you begin withdrawing money at age 70 ½ , but Roth IRAs do not have that requirement. You can convert from a regular IRA to a Roth IRA, but distributions will be taxed in the year you do.
If you will be in the same or a higher tax bracket during retirement, the Roth IRA is a good option, but if you are in need of tax deductions now, a traditional IRA is probably your best bet.