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If you are beginning to plan for your retirement or want to change your retirement savings account, you may be intrigued by a Roth IRA. Roth IRAs are popular retirement savings accounts, although contributions to Roth IRAs are not tax-deductible, any withdrawals from the account are tax-free.
There are, however, some important factors to consider when choosing a Roth IRA which we will outline below:
Distribution Rules
With a Roth IRA you will make after tax contributions and ideally grow them tax free. This is different from a traditional IRA where you make pre tax contributions (or receive tax deduction) and grow your funds tax deferred.
To receive tax free distributions from the Roth IRA you must meet certain requirements, such as having the Roth IRA open for at least 5 years and being over the age of 59.5.
If you have a pre tax account currently you may convert them into a Roth IRA, however please consult with a CPA to determine if this strategy will be wise for your personal situation.
Roth Conversion Timing
Deciding whether a Roth IRA, rather than a traditional IRA, is right for you may depend on what life stage you are currently at.
For example, if you are a young adult currently paying low tax rates, a Roth IRA conversion would make more financial sense. If, however, you are at the peak of your career and will soon be expecting your tax rates to skyrocket, sticking with a Traditional IRA may be more suited for you.
Required Minimum Distributions
Roth IRAs do not have required minimum distributions, unlike traditional IRAs. Traditional IRAs are subject to RMD, meaning the IRS requires you to take a minimum distribution each year once you reach a certain age. Due to the New SECURE Act if you were born before July 1st 1949 you will begin taking RMD’s at age 70.5. If you were born after you will begin at age 72.
Without RMD, a Roth IRA can be left for heirs or transferred to a named benefactor, stretching out the tax-free benefits.
Account limits
There is currently a $6,000 contribution limit on Roth IRAs or $7,000 if you are over the age of 50. If this is too small for your retirement plan, you may need to consider another savings account.
In order to make the most of your Roth IRA, it is advisable to pay taxes with money outside of the account, to allow the Roth IRA to grow to its full potential.
If you think a Roth IRA could be the right retirement account for you, contact Quest Trust today. We offer truly self-directed IRAs and give you complete flexibility with your investment options. Open a Quest account or sign up for one of our events today!