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Tuesday, July 5, 2022

8 Things Millennials Need to Know About Roth IRAs

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If you’re a millennial and you want to start investing and saving for retirement, consider putting your money in a Roth IRA. Here’s how young people can make the most of a Roth IRA.

If you are a single tax filer and earn more than $133,000 in 2017, you aren’t eligible to contribute to a Roth IRA. Some high earners are able to get around these income limits by making a non-deductible contribution to a traditional IRA and immediately converting to a Roth IRA.

Saving in a Roth IRA can allow you to use the money for both purposes. Even though most people think of a Roth IRA as a retirement savings vehicle, it can be used for a first-time home purchase.

You can withdraw the amount you invested in a Roth IRA without taxes or penalties. If you contributed $5,000 to a Roth IRA over a two-year period and the account value grew to $5,500, you can pull out $5,000 without worrying about penalties or taxes.

When you open a Roth IRA you will need to make contributions and purchase investments. Keep an eye on expense ratios when selecting investments.

Most people are eligible to contribute up to $5,500 to a Roth IRA in 2017. It’s important to stick to these contribution limits because there is a 6 percent excise tax on excess contributions.

Make sure you are eligible to contribute. Only those with earned income are eligible to contribute to a Roth IRA, and you can’t deposit more than you earned. If you earned $3,000 in 2017, you would only be able to make up to a $3,000 Roth contribution.

When you make Roth IRA contributions with after-tax dollars, you are paying taxes on that money while you are in a low tax bracket. If you keep the money in the account until retirement, you don’t have to worry about paying a higher tax rate on that money later, even if you have a higher income in retirement.

If you start making $5,500 Roth IRA contributions each year at age 25, by the time you are 65 you could potentially accumulate over $950,000, assuming you earn 6 percent annually. Since it’s a Roth account, you won’t owe income tax on that money in retirement.

Follow the rules. In order to qualify for completely tax-free withdrawals, you need to own the account for five years and start taking distributions after age 59 1/2. If you withdraw the money before meeting those two requirements you will owe income tax on the investment earnings, and they could also be subject to a 10 percent early withdrawal penalty.

When you make Roth IRA contributions with after-tax dollars, you are paying taxes on that money while you are in a low tax bracket. You can withdraw the amount you invested in a Roth IRA without taxes or penalties. If you contributed $5,000 to a Roth IRA over a two-year period and the account value grew to $5,500, you can pull out $5,000 without worrying about penalties or taxes. If you are a single tax filer and earn more than $133,000 in 2017, you aren’t eligible to contribute to a Roth IRA. Some high earners are able to get around these income limits by making a non-deductible contribution to a traditional IRA and immediately converting to a Roth IRA.

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