Planning for retirement
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A Roth IRA is an Individual Retirement Account (IRA) that allows one to make tax-free withdrawals in retirement. While one does not get any immediate tax benefits, contributions and earnings grow tax-free which can be withdrawn tax and penalty-free once one reaches 59 ¹⁄₂ years of age, and if the account has been open for five years. Incorporating a Roth IRA into an overall investment plan is beneficial, since the account offers many ways to maximize retirement savings and minimizes taxes.

1. Check Eligibility: Make sure one is eligible to open a Roth IRA based on one’s earned yearly income. For example, a single filing taxpayer earning over $139,000 a year may not be eligible under the current year income limitations. Check with the IRS for income limitations.

2. Choose a Financial Institution: Find a financial institution to open a Roth IRA account.

3. Fill out the required paperwork: Fill out the paperwork for the Roth IRA within the chosen financial institution. Many times this step can be done completely online or through a customer service agent within a chosen financial institution.

4. Invest money: Decide how money is invested within a Roth IRA. Choose investment options or find a financial advisor to assist when making investment decisions.

5. Contribute to a Roth IRA: A contribution schedule can be made with a bank or financial institution of one’s choice to have contributions automatically deducted from a chosen bank account, and added to a Roth IRA. Contributions can be made up until the tax-filing date in the following year, typically April 15.

The rules for withdrawal from a Roth IRA account are different for contributions and earnings. Contributions are the monies deposited directly into the account, while earnings are the profits that have accumulated in an account through investments. Both contributions and earnings grow tax-free within an account over time.

Withdrawal rules for contributions:

1. Penalty-free and tax-free withdrawals may be made if the account is 5 years old and the account holder is 59¹⁄₂ years old.

2. Contributions may be withdrawn from a Roth IRA account at any time. Contributions are made with after-tax dollars, so there are no taxes or penalties for withdrawing them.

Withdrawal rules for earnings:

3. Earnings or profits from a Roth IRA, may be withdrawn with a 10% penalty and normal federal income taxes, depending on the age of the account and account holder.

EXCEPTIONS:

4. Penalty and tax-free withdrawals may be made from a Roth IRA, after 5 years of opening a Roth IRA account and if the owner of the account is younger than 59¹⁄₂, through Qualified Distributions. Some examples of Qualified Distributions defined by the IRS are:

• First time home purchases up to $10,000
• Rolled over IRA’s (if the IRA is rolled over correctly)
• During a divorce: Under a domestic relations order, distributions may be considered qualified
• Qualified higher education expenses
• Health insurance premiums, if unemployed for more than 12 consecutive weeks
• Substantially equal payments made in a series
• The account holder becomes disabled
• Unreimbursed medical expenses that are over 7.5% of (AGI) adjusted gross income
• The account owner dies
• Birth of a child expenses/adoption expenses

Money can be withdrawn anytime from a Roth IRA account for any reason without penalties and taxes as long as they are the contributions, which are after-tax dollars, so taxes have already been paid. However, earnings (profit) made from the account, have different rules that apply when withdrawing. Withdrawing from earnings on a Roth IRA account, before the account holder is 59¹⁄₂ and/or if the account is less than 5 years old, may accrue a 10% penalty and federal taxes.

Yes, a Roth IRA does earn interest; however, the way it earns interest is different from the way interest is earned with a savings account in a bank. Interest in a Roth IRA account is earned through the investments chosen in a Roth IRA account and will earn tax-free interest as long as the account is open.