Roth IRA Accounts
What are Roth IRA accounts?
How many can you have? And who can have them?
Knowing the answers to these questions and others can significantly benefit your family's financial health.
A Roth IRA investment account is a type of Individual Retirement Arrangement (IRA) established by the federal government to provide citizens with tax-friendly retirement savings.
If you open a Roth IRA, you can make annual contributions of as high as $6,000 in some cases. These contributions then grow free of capital gains taxes and income taxes until you reach retirement age.
At age 59 ½, assuming you meet the five year holding period requirement, you can then withdraw funds from your Roth IRA account tax-free and penalty-free for retirement.
Now that you know what Roth IRA accounts are, you might want to know...
What's a self-directed Roth IRA?
A self-directed Roth IRA is nothing more than a Roth IRA which YOU control.
Need further explanation?
Well, not everyone takes the initiative like you do. Some people hire a financial advisor, have the advisor set up their Roth IRA, have the advisor choose investments, and pray everything to works out in the end.
But if you have a self-directed Roth IRA, you choose the investments. You don't trust anyone else to look after your Roth IRA account. You do it all by yourself.
A Roth IRA sounds great, right? So does that mean you can set up multiple Roth IRA accounts?
The answer is... Yes and No.
Yes, you can set up a Roth IRA account with more than one financial institution. For instance, you can have money in various accounts at places like Fidelity, eTrade, or Zecco.
No, you can't have multiple Roth IRA accounts because no matter how many physical accounts you open with different institutions, the IRS views all of those accounts as a single Roth IRA.
Does that make sense?
For example, let's say your annual Roth IRA contribution limit is $5,000.
If you have open accounts at five different financial institutions, you're free to fund each account to the tune of $1,000. Or you can put the entire $5,000 in one of those accounts and ignore the others.
But what you can't do is fund each account with $5,000 for a grand total of $25,000 in Roth IRA contributions.
Whatever your annual Roth IRA contribution limit is, that limit applies across all open IRA investment accounts.
Because in the eyes of the IRS, each of those accounts constitutes a single IRA, regardless of whether your funds are in a Roth IRA, a Traditional IRA, other IRAs, or a combination thereof.
So who can get a Roth IRA?
Anyone who generates earned income for the taxable year can open and fund a Roth IRA, assuming they don't exceed the maximum income limit for making a contribution.
So if your five-year old sells lemonade for a profit of $200 in 2009, she can open a Roth IRA and fund it up to $200. But if grandma just gives her $200 for her birthday, those funds aren't eligible to go into a Roth.
Because the $200 birthday gift doesn't qualify as earned income. It's a gift. And you can only make Roth IRA contributions with earned income.
Similarly, you're restrained by the amount of money you can earn in a given tax year while still contributing to a Roth IRA.
For instance, an unmarried individual who earns $116,000 or more can NOT contribute any amount to a Roth IRA.
So if you earn $125,000 per year, you can't contribute a dime to your Roth IRA. But if you earn $100,000 per year, you can contribute. However, the amount of your contribution varies according to your adjusted gross income.
Can you open a Roth IRA for your spouse?
Yes. If you're married, nothing other than income prohibits both you and your spouse from contributing the maximum amount to separate Roth IRAs.
For instance, if you're 40 years old, unmarried, and earn $75,000 per year, you can contribute the maximum of $5,000 per year to your Roth IRA.
But what if you and your spouse each earn $75,000 per year?
In this case, both of you can make $5,000 Roth IRA contributions to separate accounts (each Roth IRA account is held in each individual's name).
Because if you're married and have a combined annual income of $159,000 or less, you can contribute the maximum amount to your Roth IRA.
Of course, it also depends on whether or not you and your spouse file joint tax returns or separate tax returns. Your income, along with the type of tax return you file, will determine the precise dollar amount you're allowed to annually contribute to your Roth IRA.
Can you open a Roth IRA for your kids?
Yes... If your kids generate earned income, and they don't exceed the upper income limit for making a Roth IRA contribution.
For instance, let's say your teenage daughter works as a lifeguard during her summer break from high school. As long as she doesn't earn more than $116,000 in one tax year (that would be quite a lifeguard job!), she's eligible to make the maximum Roth IRA contribution for her age. In this case, $5,000.
So if she earns $4,000, she can contribute the entire $4,000 to her Roth IRA. Or she can contribute $3,000 to her Roth IRA and spend $1,000 on whatever else she wants. She's free to decide how much of the $4,000 she wants to contribute, but even though her limit is $5,000, she can't contribute more than $4,000.
Because you can never contribute more to your Roth IRA than you earn. Remember, your Roth IRA must be funded with earned income.
So making a $5,000 Roth IRA contribution with her $4,000 in earnings and $1,000 from her savings account is not an option.
Roth IRA investment accounts have limits, but age is NOT one of them. So you can open a Roth IRA for your kids.
Roth IRA Accounts
The benefits of opening a Roth IRA investment account are numerous. You can invest your money for retirement without worrying about capital gains taxes or income taxes. And when you retire, you can withdraw those funds tax-free!
Better yet, you can open a self-directed Roth IRA and make your own investment choices. With a self-directed Roth IRA, you control your own financial destiny!
But remember, you can only have one Roth IRA. You can spread that Roth IRA across multiple accounts with different financial institutions, but in the eyes of the IRS, all of those accounts are one Roth IRA.
Remember, only one Roth IRA for each individual.
You can have a Roth IRA. Your spouse can have a Roth IRA, and your kids can have a Roth IRA. Even your 105-year-old great, great grandfather can open and fund a Roth IRA!
So what are you waiting for? Keep reading, keep learning, and start funding your own Roth IRA investment account today...
5 Tips For Increasing Your Roth IRA Savings - When it comes to saving for retirement, your Roth IRA savings is particulary valuable. Why? Because unlike your 401k, Traditional IRA, or most other tax sheltered retirement savings accounts, withdrawals from your Roth IRA are tax-free during retirement. And your goal is to end up with as much money as possible in retirement, right? If so, here are five ways you can increase your Roth IRA savings today. Read more
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