Before you open a Roth IRA or convert your regular IRA to a Roth, you need to learn about the Roth IRA pros and cons, so that you can make the best decision possible for your situation.
An excellent advantage of a Roth IRA is that you do not have to take any withdrawals when you reach 70 1/2. This allows more money to keep on earning interest, but it will also put limitations on your taxable Social Security benefits due to increased income.
Another advantage of a Roth IRA is that you can withdraw some of the money from it without any penalties. The only time you will need to pay taxes is when you withdraw the interest, says Wealthwire.com. This feature may enable you to use this account for an Emergency Fund, too.
Almost anyone can get a Roth IRA, as long as they have earned income. The limitations on this will vary, according to the FreeFinancialAdvisor.com. For instance, for those who are married and filing jointly, you can earn up to $183,000 and still make Roth IRA contributions. Individuals who file as Single, Head of Household, or Married Filing Separately, can contribute up until they make more than $110,000 annually. The good news is that some companies will even allow you to open a Roth IRA with as little as $50.
It is also possible to save money if you start to put money into a Roth IRA when you are younger. Under normal circumstances, people make less money when they are younger and are in a lower tax bracket. Then, when older, they are usually in a higher tax bracket. This will enable you to have more money built up by retirement time, says the Roth IRA website.
If you already have money in an IRA, and you want to make an IRA conversion, there may be a problem. USAToday.com says that any money that has not yet been taxed – and it won’t be in a traditional IRA – you will have to pay tax on that money when you create the account. You may want to avoid converting to a Roth IRA if you do not have the funds available to pay for the taxes on the untaxed amount.
One way that the tax amount could be reduced, though, is to pay some of it in one year, and the balance in the next. If you use money from your traditional IRA to pay the tax bill, you will be charged an additional 10 percent for early withdrawal.
A powerful advantage of getting a Roth IRA is that it can be used as a trust to give to your heirs. Because taxes have already been paid, your heirs can withdraw money when they need it without a tax penalty, says BusinessInsider.com.
One reason you may not want to convert to a Roth IRA is because it may change your tax bracket. Since money put into a 401(k) or a traditional IRA is not taxable, by putting that same money into a Roth IRA will mean that it now becomes taxable – adding to your bottom line.