The money you put in can be deductible in the year added to your account.¹
You put the money in the account after you’ve paid taxes on it.
Taking money out
Your money—contributions and any earnings—is taxed as ordinary income when you take it out.²
Taking money out
Your contributions can be taken out tax free.³ Earnings on your investments can generally be taken out tax free five years after being added to your Roth IRA.
2 Who can open an IRA?
Anyone can open an IRA. There are no age limits, as long as you have earned income to contribute. Your income may come from:
- Self-employment income
3 When should you open an IRA?
Timing is important. Although there may be no bad time to save for retirement, opening an IRA when you’re young is generally the best time. This is because you’re more likely to be eligible based on your income and can take advantage of more time to potentially build up your balance due to compound interest.
It may be an ideal time to open an IRA if you:
- Don’t have access to a retirement plan at work
- Work freelance jobs
- Maxed out your workplace plan contributions but still have money to put away
- Left your employer and want to roll over your 401(k) to your IRA
- Have 401(k)s from previous employers or multiple IRAs and want to consolidate them into one, so you have a clear picture of your retirement savings4
- Are subject to low federal income-tax rates
4 Can you convert from a traditional IRA to a Roth IRA?
If you have a traditional IRA, you may want to consider converting some or all the account balance to a Roth IRA. Choosing the right time to make the conversion is important because there may be tax implications.
Converting to a Roth IRA may make sense if you’re experiencing any of the following:
- Lower income—With a traditional IRA, you pay income taxes on withdrawals5 during retirement, but you don’t pay taxes after making a withdrawal from a Roth IRA. When you convert your IRA, you pay tax at your current rates, so if your income this year has put you in a lower tax bracket, you may have a tax advantage.
- Contribution restrictions—The IRS places restrictions on who can contribute to a Roth IRA.
- Required minimum distributions (RMDs)—You’re required by the IRS to withdraw some money from your retirement accounts once you reach a certain age, but Roth IRAs don’t have RMDs—you can leave your money in as long as you want to.
Making the right decision about opening an IRA
IRAs can play an important role in your retirement savings strategy. Your personal circumstances should be considered when weighing the options. It’s important to understand how IRAs work, so you can decide whether and when to open an account.
1 Tax deductibility is based on meeting certain IRS criteria. 2 Ordinary income taxes are due on withdrawal. Withdrawals before the age of 59½ may be subject to an early distribution penalty of 10%. 3 Distributions from Roth accounts must be “qualified” for both the contributions and earnings to be treated as tax free. Certain conditions would apply. See your plan document for more details. All references to tax-free treatment of qualified distributions are intended to refer to the treatment of such distributions at the federal level only. You may want to consult a professional tax advisor regarding any tax issues discussed. 4 As other options are available, such as leaving it in your old plan, rolling over to an IRA, or cashing out, you are encouraged to review all of your options to determine if combining your retirement accounts is suitable for you. 5 Income-tax rules on how withdrawals are handled may vary from state to state.
Any tax-related discussion contained in this publication, including any attachments, is not intended or written to be used and cannot be used for the purpose of avoiding any tax penalties or promoting, marketing, or recommending to any other party any transaction or matter addressed. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this publication.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.