How Does a Roth IRA Work?

A Roth IRA allows you to invest money you’ve already paid taxes on. Once inside your account, you can accumulate compound interest tax-free. Since you are investing money that has already been taxed, there are no tax ramifications when you reach retirement age and withdraw the funds.

Roth IRAs are very popular for individuals who believe they will be in a higher tax bracket at retirement or fear that taxes will go up during their lifetime–which is typically a good bet.

What’s the Difference Between a Traditional IRA and Roth IRA?

Roth IRAs allow you to contribute after-tax dollars, while traditional IRAs tax you at the time of withdrawal (e.g., retirement).

Both accounts allow for the same contribution limits and withdrawal rules but come down to an individual preference whether or not you want to pay your taxes at contribution or disbursement.

Roth IRA Overview

Roth IRAs are popular investment vehicles thanks to their diversity and versatility.

Here are some essential rules and guidelines governing Roth IRAs to understand.

Withdrawals

One of the biggest benefits of a Roth IRA is that you can access your funds whenever necessary after the age of 59.5. You can access these funds earlier, but you must pay taxes on any interest generated from your account.

Fees

There are three types of fees associated with Roth IRAs. First, account maintenance fees are charged by the entity holding your account. These provider maintenance fees typically run between $25 and $50 per year.

Since Roth IRAs play the stock market, you may also be responsible for transaction fees for any moves you make. These fees typically range between $5 and $20 per transaction.

Finally, since mutual funds are the most popular type of Roth IRA investments, there are mutual fund ratios and sales loads fees associated with a Roth IRA. These fees are represented as an annual percentage of the money that you have invested.

Distributions

For distributions to be considered “qualified,” the distribution must occur at least five years after the account was established. There are also rules in place that dictate how old you must be to make a withdrawal, what the money is being used for, your disability status, and if the funds are being distributed to a beneficiary after your death.

Contribution Limits

Under current laws, your annual contributions can’t be more than $7,000 or $8,000 if you are age 50 or older.

Tax Advantages

The biggest tax benefit of a Roth IRA is that money in your account grows tax-free. In addition, your funds can be withdrawn if you are 59.5 years old or older without taxation.

Five-Year Rule

The Roth IRA five-year rule prohibits you from withdrawing any money from your account if your account is not at least five years old.

What Can You Invest in With a Roth IRA?

You can invest in stocks, mutual funds, bonds, and even real estate when using a Roth IRA. However, you will not be able to invest in real estate, gold, or other alternative assets like a self-directed IRA.

Who’s Eligible for a Roth IRA?

If you are married and filing jointly, and your MAGI (Modified Adjusted Gross Income) is $246,000, you are not eligible for Roth IRA contributions.

Meanwhile, if you are married and filing jointly with an income between $236,000 and $245,999, you can make a partial contribution. For singles, the income limit in 2025 is $165,000.

Pros and Cons of a Roth IRA

Pros

Cons

  • Withdrawals taken before 59.5 years old are taxed again
  • There are income limits that prevent some individuals from opening an account
  • There is a limit to your yearly maximum distribution

How to Open a Roth IRA

Once you have ensured that you are eligible for a Roth IRA, you can choose who to open the account with. At that point, you simply need to fill out the paperwork, choose your investments, and determine your contribution schedule.

Horizon Trust is ready to assist you in opening an account and taking advantage of all the tax benefits available to your Roth IRA. To get started, fill out the form on our website or contact a customer service representative to assist you on your journey.

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