In order to discuss a ROTH IRA, we first need to describe what is an IRA (or Individual Retirement Account). An IRA is a personal savings account that allows individuals to save specifically for retirement. Anyone can contribute the $6,000 allowable amount for 2019, but only some people can take a deduction on their tax return for the amount contributed. Those people must not exceed certain taxable income levels. All monies put into an IRA grow tax-deferred (meaning there is no annual tax due). If you claim the deduction, all monies pulled out of the IRA are subject to income taxes at the then current rate. If monies are pulled out prior to 59 ½, there is a 10% penalty in addition to the tax. (There are allowable exceptions to avoid the penalty).
Now about ROTH IRAs. They too are retirement savings accounts with the same contribution limits and penalties for early (pre-59 ½) withdrawals. The big difference with a ROTH is you cannot take a tax deduction upon your contribution and only those that are under the max income amount may contribute. However, if you are eligible to contribute, the growth of all monies and your contributed investment is never taxed. That’s right, no tax while it’s accumulating nor when you take the money out (after 59 ½).
So, should you have an IRA or a ROTH IRA? You must ask yourself; do I think I’ll be paying less in taxes when I pull my IRA money out or more? If less, than contributing to a regular IRA and taking a deduction now probably makes more sense. If you’ll be paying more in taxes later, then contributing to a ROTH IRA now makes sense. There is pending legislation that may change some of the rules around IRAs and ROTH IRAs, so stay tuned. If you would like to learn whether you should have a ROTH IRA, give us a call.