How to Achieve Tax-Free Income with a Roth IRA
How to Achieve Tax-Free Income with a Roth IRA

For many taxpayers, the thought of having to pay taxes on their retirement savings is enough to make them cringe. Fortunately, there is a way to accumulate and withdraw funds from your retirement account without having to worry about paying Uncle Sam a dime. A Roth IRA offers tax-free growth and withdrawals for qualified taxpayers. Here’s an overview of how it works.

 

What Is a Roth IRA?

A Roth IRA is an individual retirement account that allows taxpayers to save for retirement on a tax-deferred basis. Contributions to a Roth IRA are made with after-tax dollars, which means that you won’t get a tax deduction for your contributions. However, all earnings on your Roth IRA grow tax-free, and as long as you meet the requirements, you can take tax-free withdrawals in retirement.

 

To be eligible for a Roth IRA, you must have earned income from working. If you’re married, your spouse must also have earned income. There are also limits on how much money you can contribute to a Roth IRA each year. For 2022, the contribution limit is $6,000 ($7,000 if you’re age 50 or older).

How Does It Work?

The biggest benefit of a Roth IRA is that it offers tax-free growth and withdrawals in retirement. That’s because you’ve already paid taxes on the money that you’ve contributed. So, when you withdraw your money in retirement, you won’t have to pay any taxes on it.

 

Another benefit of a Roth IRA is that there are no required minimum distributions (RMDs). With traditional IRAs, you’re required to start taking distributions at age 72 (or 70 ½ if you reached that age before January 1, 2020). With a Roth IRA, there is no such requirement. That means you can let your money continue to grow tax-free until you need it in retirement.

 

And if you should happen to need the money before reaching retirement age, there are some circumstances under which you can take early withdrawals without having to pay the 10% early withdrawal penalty. These include using up to $10,000 of your contribution towards the purchase of your first home or incurring substantial medical expenses.

 

A Roth IRA offers taxpayers a unique opportunity to grow their retirement savings on a tax-deferred basis and enjoy tax-free withdrawals in retirement. If you think a Roth IRA might be right for you, talk to your financial advisor about how best to take advantage of this powerful tool.