Jane Joness | Writer

What is a Roth IRA? Retirement is one of the major milestones in every individual's life. To have a comfortable post-retirement life, it is essential to diversify your financial portfolio and include pension plans, savings plans, and other retirement-focused financial products. The investment options available for this purpose may vary from one country to another.

In the United States of America (USA), a Roth IRA is one such retirement-focused investment option.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that offers the advantage of tax-free investment growth. To invest in a Roth IRA, you need to contribute after-tax or post-tax dollars to your Roth IRA. This is money from which tax has already been deducted. On account of this, the withdrawals made from a Roth IRA are tax-free (subject to certain conditions).

So, you pay taxes on the money that you contribute to your Roth IRA investments and receive the advantage of withdrawing your contributions without paying any taxes thereon. This is different from a traditional IRA, where you contribute pre-tax income to the account and earn tax deductions on the contribution, but owe taxes on the distributions or withdrawals made at retirement.

Key features of a Roth IRA

A Roth IRA is not exactly a pension plan. Instead, it is akin to a retirement plan that helps you build a sufficient retirement corpus if you are working in the USA. If you are planning to invest in a Roth IRA, here are some important features of this investment option that you should be aware of before opening an account and contributing to it regularly.

  • No age limits

There is no specific age limit on opening a Roth IRA. The only criteria to open an account and contribute to it pertain to your income level. As long as you earn the required level of income, you can invest via this retirement account.

  • Flexible sources for contribution

You can make contributions to your Roth IRA from different sources like regular contributions, spousal contributions, and rollover contributions. What's more, you can also contribute via transfers or conversions from other pension plans like a simple IRA or a 401(k) account.

  • A wide range of investment options

The funds that you contribute to your Roth IRA can be invested in a wide range of assets like stocks, bonds, mutual funds, exchange-traded funds (ETFs), money market funds, and certificates of deposit (CDs).

  • Limits on Roth IRA contributions

While there may not be any age limit, there are limits on Roth IRA contributions that depend on your filing status and your income range, as outlined below.

Filing status and income limits for the year 2023 Maximum annual Roth IRA contribution

Married but filing separately from your spouse (if you lived with your spouse at any time during the year Below $10,000 Reduced contribution
$10,000 or more No contribution allowed
Single or head of household or married but filing separately (if you did not live with your spouse at any time during the year Below $138,000 $6,500 if you are below 50 years of age $7,500 if you are aged 50 or more
$138,000 or more, but below $153,000 Reduced contribution
$153,000 or more No contribution allowed
Single or head of household or married but filing separately (if you did not live with your spouse at any time during the year Below $218,000 $6,500 if you are below 50 years of age $7,500 if you are aged 50 or more
$218,000 or more, but below $228,000 Reduced contribution
$228,000 or more No contribution allowed
  • No Required Minimum Distributions (RMDs)
  • A Required Minimum Distribution (RMD) is a sum of money that must mandatorily be withdrawn from a retirement plan at a certain age or point in the investment tenure. Roth IRAs do not come with such restrictions or requirements. So, you need not withdraw your contributions unless you intend to.
  • Tenure and investment flexibility
  • There is also no limit on the tenure of a Roth IRA. You can maintain your IRA indefinitely, and even choose when you contribute to your individual retirement account during the year. The deadline for making your annual contributions is the tax filing due date. So, you can either make your Roth IRA contribution as a lump sum payment at the start of the year or contribute smaller sums all through the year.
  • Tax benefits
  • Withdrawal of your original contribution from your Roth IRA is always tax-free. Furthermore, your returns or earnings may also be tax-free upon withdrawal if you meet the required guidelines.

Roth IRA withdrawal rules

There are some key withdrawal rules that you should be aware of if you have (or are planning to open) a Roth IRA. These rules are summed up below.

  • When you withdraw any money from your Roth IRA, it is always assumed that your contribution is withdrawn first, followed by the returns thereon.
  • There is no tax due on the contributions since you have already paid taxes on the same.
  • However, distributions or returns are also tax-free, provided you are at least 59.5 years of age and have held your Roth IRA for a minimum period of 5 years.

Conclusion

While a Roth IRA may be only available for people working in the United States, there are various other retirement products and pension plans available in India that you can use to your advantage if you reside in the country. To create a retirement plan that best aligns with your requirements, you need to factor in your retirement goals, the time left to retire, and your risk profile.

In case you are having trouble drawing up a retirement plan, you can use a pension plans calculator for more clarity. Additionally, you can also rely on expert financial advice to tailor your retirement portfolio as per your specific requirements.



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