If you want to live the good life in your golden years, then retirement savings should already be a part of your budget. The sooner you start to save, the better. Luckily, the government gives you tax breaks if you save through certain accounts, like a Roth IRA.
With a Roth IRA account, you can only withdraw tax- and penalty-free if you meet two criteria—you've been contributing to the account for at least five years and you’re over 59½ years old. You can also receive these same exemptions if you’re permanently disabled, withdrawing up to $10,000 for a first home purchase or assigning the payments to a beneficiary or to your estate upon passing.
The sooner you open a Roth IRA, the longer your retirement nest egg grows tax-free. One easy way to visualize the potential of your retirement contributions is with a Roth IRA calculator. Below are some other tips about how to get started.
Where to Set Up Your Roth IRA
You can continue to stash money under your bed, but you can't call it a Roth IRA. Thankfully, there's a wide range of options for where you can invest—including banks, mutual fund companies, life insurance companies, stockbrokers and credit unions such as Navy Federal. Look at the investment options each offers and how much you'll pay in fees (if anything). Common investments in Roth IRAs include stocks, bonds, mutual funds, money market accounts and certificates.
Some financial institutions don't charge an annual fee for account maintenance. Depending on the type of investment, you may pay overall management fees. For example, if you invest in the stock market, then fees are assessed on the amount of your investment. The amount depends on the level of management services you choose. Make sure you read the fine print and ask lots of questions before signing on the dotted line.
Eligibility for Creating a Roth IRA
To put money in a Roth IRA, you must have up to a certain amount of taxable income from work, like wages, overtime or a bonus. According to the IRS, the amount of Roth IRA contributions you can make for 2016 depends on whether you're single or married. This can change each year. For instance, in 2016, you can't contribute to a Roth IRA if you're single and earn more than $132,000. If you're married, the limit is $194,000. If both you and your spouse are working, then you must open separate Roth IRAs. You can't have a joint Roth IRA. However, as long as you're both eligible, you can make full contributions to your own accounts.
Each financial institution has its own application form and process for opening a Roth IRA. They all ask for your name, address, Social Security Number and how you want the money to be deposited. For example, you can put some of your contribution into a mutual fund and another portion into a certificate. If you have questions, then the person helping you open your Roth IRA should have the answers.
You can easily fund your Roth IRA by making a contribution from your existing checking or savings account. Should you wish to use funds from an existing Roth or post-tax, employer-qualified retirement plan, Navy Federal also accepts rollovers and transfers. Lastly, designate a beneficiary (the person or people who would inherit your IRA if you were to pass away before cashing it out).
Limits on Contributions
The amount you can contribute to your Roth IRA is limited each calendar year. If you also make contributions to a traditional IRA, the total contribution amount cannot exceed your limit for the year. For 2016, it's $5,500 if you're 50 or younger. If you're over 50, then it's $6,500. If your earned income is less than the limit, then you can contribute only the amount of your income. So, if you earned only $5,000 because you were unemployed most of the year, then $5,000 is all you can contribute to your Roth IRA that year.
If you're married and file a joint tax return, then the IRS allows you to count the earned income of your spouse toward your eligibility to contribute the maximum to a Roth IRA. If you're a stay-at-home parent with no earned income of your own, then you can still make a Roth IRA contribution based on your spouse's earnings.
Roth IRAs are a good retirement vehicle, but it’s important to fully understand what you’re investing in before getting started. Get in touch with a financial professional today to help decide if this is right for you.