What is a Roth IRA?
IRA stands for Individual Retirement Arrangement, but some also call it an Individual Retirement Account. It’s one of the more common ways Americans save for retirement. Here’s what makes a Roth IRA different than a traditional IRA:
Traditional IRAs are funded with pre-tax dollars, which means you should be prepared to pay taxes on any distributions when you or your heirs withdraw money from the account.
Roth IRAs are funded with after-tax dollars, which means the original owner can make tax-free and penalty-free withdrawals of earnings if the 5-year holding requirement is met that they occur after age 59 ½. Think of a Roth IRA as an optional tool for your retirement strategy. When retirement rolls around, Roth IRAs can add flexibility to your income strategy since you’ve already paid taxes on that money.
Here’s why: unlike their traditional IRA cousins, required minimum distributions do not apply to original owners of Roth IRAs, which can play a role as you create an estate strategy.
There are rules! To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a 5-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be made under other circumstances, such as the owner’s death. The original Roth IRA owner is not required to make minimum annual withdrawals.
Owning a Roth IRA can provide flexibility. However, similar to any idea, it isn’t one-size-fits-all. Many factors should be considered, including your tax situation, existing IRA balances, and long-term goals.
This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm.