What Is A Roth IRA?

Brandon R. Amaral, CFP®, EA
Brandon R. Amaral, CFP®, EA

Founder & Financial Planner, Amaral Financial Planning

The world of finance is made up of many different acronyms. From 401(k)s to HSAs and CDs, it can seem like its own language. A very common term that you will likely hear about is a Roth IRA (Individual Retirement Account).

Roth IRAs offer many benefits that can help you save for retirement and avoid taxes in the future. There are very specific rules that restrict who can have these accounts, how much you can contribute, and what kind of assets can be held in them.

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Here is an overview of Roth IRAs:

What is a Roth IRA?

A Roth IRA is a type of investment account that is used to save for retirement. The primary benefit of a Roth IRA is that your contributions can grow tax-free and be withdrawn tax-free in retirement after you reach age 59 1/2.

Roth IRAs are fairly new accounts and became available in the late 90s. As part of the Taxpayer Relief Act of 1997, Senator William Roth helped create the Roth IRA, which primarily benefits young people with lower incomes.

Who can have them?

Anyone can open a Roth IRA, however, there are strict rules on who can contribute to them. These restrictions are based on income level and the type of income you earn.

First, if your income is over the annual income limits set by the IRS, then you cannot contribute directly to a Roth IRA. For 2022, the income limits start at $129,000 for individuals and $204,000 for couples.

Second, your income needs to be earned. Earned income is any income that you receive from working for someone else, or for yourself. Earned income specifically excludes:

  • Alimony
  • Child support
  • Social security benefits
  • Unemployment benefit
  • Interest and dividends from stocks

How much can you contribute?

For 2022, the maximum you can contribute to a Roth IRA is $6,000. If your total earned income for the year is less than $6,000, then your earned income will be the maximum amount you can contribute. For individuals who are aged 50 and over during the year, you can also contribute an additional $1,000.

If your income happens to be over the income limits set by the IRS, then your maximum contribution amount could be partially or completed phased out. These ranges are $129,000 to $144,000 for individuals and $204,000 to $214,000 for couples.

What can be held in them?

For IRAs, you can hold most types of investments, including stocks, bonds, mutual funds, annuities, ETFs, real estate, and crypto. The catch is, that these holdings cannot be contributed to a Roth IRA, and can only be purchased within them.

Few assets that are not eligible to be held in Roth IRAs include collectibles like art, antiques, metals, stamps, or coins. If you opt to hold real estate in your Roth IRA, you cannot benefit from the property in any way, such as personally living there or receiving any rental income.

Roth IRAs are great investment vehicles to start saving for retirement and limit your future tax bill. If you would like to work with a financial planner to walk you through your options, I would love to help you!

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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.