5 Rules to Know Before Opening Your Roth IRA Account

No matter how far you are from retirement, savings vehicles that allow you to invest for the future and save on taxes are all around you. While a 401(k) and a traditional IRA can be funded with pre-tax dollars now, thus reducing your gross or taxable income, a Roth IRA is funded with post-tax dollars. When you take money out of a Roth, your withdrawals do not increase your taxable income.

What is a Roth IRA?

A Roth IRA is an investment vehicle that puts post-tax dollars into the stock market for reinvestment and growth. You cannot access the funds in a Roth IRA until you are 59 and 1/2 or unless you are in a hardship situation. You can usually put up to $6,000 into a Roth IRA each year and may be able to add more depending on your age.

What is a Qualified Dividend?

A qualified dividend is a dividend that is taxed at the capital gains rate instead of the standard income tax rate. While Roth dividends are tax-free as long as the account has been in place for 5 years, setting up other investments that payout only qualified dividends will likely take a conversation with your financial adviser. Qualified dividends can change, so keeping an eye on that area of the market takes focus.

Your Roth IRA distributions can be taken later than those from a standard retirement account. However, you will want to connect with your financial adviser to stay on top of the Required Minimum Distribution rules.

5 Rules to Know Before Opening Your Roth IRA Account

  1. According to the experts at SoFi, “your Roth IRA is a great vehicle for those who expect to earn a higher income after retirement.”
  1. When determining how to start Roth IRA contributions, take care to review all tax breaks you may get from other vehicles if you do not have many deductions now.
  1. Consider setting up Roth IRAs for your spouse and family. If you have a non-earning spouse, you can set up a Roth to build their retirement savings. If your children work for your business, you can contribute up to their total earned income into a Roth IRA for their benefit.
  1. When creating accounts for families, make sure the account is in their name. If the children are under 18, they may need a custodial brokerage account to manage the money.
  1. If you make too much, you cannot set up a Roth IRA. However, you may be able to bump up your 401(k) contributions to lower your modified adjusted gross income, which can qualify you for a Roth. Talk to your financial adviser about this limitation, as the brackets are always moving, and you may have other options.

You will never be sorry that you saved too much for retirement. If your spouse has stayed home to care for children, a Roth on their behalf is an excellent choice. Allowing your children to build wealth and learn about the markets early is also a terrific decision.