Can a Roth IRA fit into your savings strategy?
The Roth individual retirement account (Roth IRA) has been a popular choice. It can help you manage the risk of paying higher taxes when you're retired, while offering additional tax benefits.
The benefits of a Roth IRA
Contributions to a Roth IRA don't reduce your current taxable income like pre-tax contribution in your employer's retirement plan (401(k) or 403(b)) do, or a Traditional IRA may.
But like those accounts, it will defer possible investment growth from annual taxation—potentially leaving you with more money to reinvest for your future.
Roth IRAs also let you make tax-free withdrawals of both your principal (contributions you’ve made) and earnings. However, your Roth IRA must be open for 5 years, and you’ll need to meet one of the following criteria:
- You are 59½ or older.
- You withdraw $10,000 or less from the Roth IRA to purchase your first home.
Generally, Roth IRA withdrawals are also tax-free in the event of death or disability. This is different from your employer's retirement plan, where withdrawals of your pre-tax contributions are generally treated as taxable income.
Can you contribute?
The IRS imposes limits on who can qualify to contribute to a Roth IRA. For 2017, those limits are:
Other reasons to consider a Roth IRA
- You can convert Traditional IRAs and certain pretax qualified employer retirement plan account balances (subject to the plan's provisions***) to a Roth IRA.
- You’ll have to pay tax up-front on some or all of the amount you convert, but your money will be tax-free as long as you meet the withdrawal criteria mentioned above.
- A Roth IRA can give you more flexibility in retirement.
- Because Roth withdrawals are generally tax-free, they help keep your tax bill lower in retirement since qualified distributions are not recognized as taxable income.
- Roth IRAs have estate-planning benefits.
- You can keep contributing after age 70½—the cutoff for a Traditional IRA—and you don't have to take required minimum distributions. What's more, your heirs won't pay taxes on withdrawals from a Roth IRA that you leave to them.
*Individuals age 50 and older may be allowed to make additional "catch-up" contributions of up to $1,000 annually.
**In this MAGI range, contribution limits are reduced on a sliding scale per IRS guidelines, and dollar limits are for the 2017 calendar year. See IRS publication 590-A for worksheet on reduced contribution.
***Some retirement plans only allow funds to be transferred with a benefit event or if age 59½ or older.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
This document is not a recommendation and is not intended to be taken as a recommendation. This material was prepared for general distribution and is not directed to a specific individual.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.