What is a Roth IRA?

When you start a savings account to prepare for retirement, you have many options for maximizing your nest egg.

Your job may offer a savings plan such as a 401(k), but you are not limited to employer-sponsored plans. You can also open an individual retirement account to supplement your 401(k) plan. IRAs are opened at a financial institution, and you make contributions whenever you want. These can include stock options, mutual funds, bonds and other assets. Not everyone can use these accounts, as they have certain eligibility criteria, such as your income.

There are a few types of individual savings plans, and many investors choose a Roth IRA. Unlike a traditional 401(k) plan, this savings plan allows you to pay tax on your contributions so that you get tax-free growth in return. Additionally, you don't pay taxes when you make withdrawals during retirement. If you're already enrolled in a traditional IRA, which is tax deferred, you have the option to convert your plan to a Roth account, but you'll have to wait five years before you can enjoy tax-free withdrawals.

What are the benefits of a Roth IRA?
Depending on your age and financial situation, Roth individual savings plans can be a great way to expand your total retirement fund. Just as you compare checking accounts, you need to consider all options and choose which one is best for your needs. Here are some advantages of the Roth IRA:

  • No age ceiling: With a traditional IRA, you cannot make contributes once you're older than 70 ½. Roth IRAs, on the other hand, do not have this limit. While the rule may not seem like a problem for some investors, you may want to pass on whatever savings you have left after your death, and having an age limit for contributions constricts the amount that can be left to heirs.
  • No required minimum distributions: The age ceiling for traditional IRAs also applies to when you have to start making withdrawals. After that point, you're required to take out a predetermined amount of your savings each year. However, with a Roth IRA, you can let your money continue to grow without touching it, another advantage if you're looking to pass those assets onto your children or grandchildren.
  • Taxed contributions: With tax-free growth, you can ultimately save more if you start with a Roth IRA when you're younger.
  • Penalty-free withdrawals: With 401(k) plans and traditional IRAs, there are penalties for making withdrawals before you reach the appropriate age. These penalties can be sizeable, and many investors are in a tough position if they can't access their funds or acquire money through other means, such as home equity loans. With a Roth IRA, however, you can make withdrawals from your contributions at any time for any reason. You can only withdraw what you deposit, and there are penalties for touching money gained from interest. This exemption is extended to interest if you meet one of a few qualifying reasons, including medical expenses, college debt and paying for a first-time home purchase, or if you're older than 59 ½.  If you converted from a traditional IRA to a Roth account, you have to wait five years before you can make penalty-free withdrawals.

Is a Roth IRA right for you?
Getting a retirement savings plan with taxed contributions can be the perfect way to boost your savings for the golden years. Keep in mind that you'll need to consider your individual savings goal as well as how you can realize even bigger tax benefits by diversifying your plan.

For more information on effective wealth management strategies, contact Landmark Bank.

Investment products and services are not FDIC insured, not insured by any federal government agency, not a deposit or bank obligation, not financial institution guaranteed, subject to investment risk, including potential principal loss.

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