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What Is a Roth Iraor

What Is a Roth Iraor

What Is a Roth Ira

A Roth IRA is a type of employer-sponsored retirement account. You invest money you’ve set aside into it with your contributions, and your employer contributes money for you at a predetermined rate. Your contributions are tax-deductible by the IRS, but not all of your gains are, so your total tax liability will be less the total value of your Roth account.

Tax

Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how they’re taxed. Roth IRAs are funded with after-tax dollars; this means that the contributions are not tax-deductible. But once you start withdrawing funds, the money is tax free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

For individuals working for an employer, compensation that is eligible to fund a Roth IRA includes wages, salaries, commissions, bonuses, and other amounts paid to the individual for the services that they perform. It’s generally any amount shown in Box 1 of the individual’s Form W-2. For a self-employed individual or a partner or member of a pass-through business, compensation is the individual’s net earnings from their business, less any deduction allowed for contributions made to retirement plans on the individual’s behalf and further reduced by 50% of the individual’s self-employment taxes. (Source: www.investopedia.com)

Pay

Under age 59½: Earnings are subject to taxes and penalties. You may be able to avoid the penalty (but not the taxes) if you use the money for a first-time home purchase (a $10,000 lifetime limit applies), qualified education expenses, unreimbursed medical expenses, if you have a permanent disability, or if you pass away and your beneficiary takes the distribution.

The special provision allows the retirement account holder to take the distribution as a standard withdrawal, with no repayment, or as a loan with a repayment option. The distribution was exempt from the 10% early distribution penalty but was taxed as ordinary income. The CARES Act allows the withdrawal to be taxed as ordinary income in full in 2020 or over a three-year period in 2020, 2021, and 2022. If you plan to pay back the funds, you have until the end of the third year. Please note that you will still have to pay taxes on the distribution until the year you pay it back. (Source: www.investopedia.com)

 

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