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How A Roth IRA Works

If you are planning on saving for retirement, you may have questions about how a Roth IRA (Individual Retirement Account) works. While this type of IRA is similar to a traditional IRA, there are a few significant differences that can affect which option you choose for retirement.

Keep reading to learn five important details about Roth IRAs.

What Is a Roth IRA?

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A Roth IRA is a retirement savings account that allows you to earn tax-free returns over an extended period of time. Like many retirement accounts, this retirement account offers a tax benefit that can result in a sizable nest egg once you reach retirement age.

5 Facts About How a Roth IRA Works

1. A Roth IRA offers a tax benefit. Unlike contributions to a traditional IRA, your contributions to a Roth IRA are made with post-tax dollars. The account holder benefits from tax-free earnings on his or her contributions and the fact that qualified distributions from the account are not taxed as income.

2. There are limits to your Roth IRA contributions. You can contribute to your Roth IRA every year, regardless of your age. To contribute, however, you must have earned income. Your contributions are also subject to IRS limits that change annually. Note that the deadline to contribute to the previous year’s IRA is the tax filing deadline in the current year (typically April 15th).

3. Anyone can open a Roth IRA. There is no age requirement to open a Roth IRA, but you must earn taxable income to open and contribute to a Roth IRA. There are, however, certain income limitations that may impact your ability to contribute to a Roth IRA. 

4. You can make withdrawals anytime from a Roth IRA. Since your contributions have already been taxed, you can make a qualified distribution if it meets the following requirements—the distribution must be made after the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA and it must be made when you reach age 59 ½.

Withdrawals from your earnings before you reach 59 ½ will cost you a 10% IRS penalty tax. Withdrawals are generally exempt from this tax if the funds are used to purchase your first home or they are used for qualified educational expenses.

5. You can design your Roth IRA portfolio. With a Roth IRA, your contributions can be used to buy a variety of savings products.

Synchrony Bank does not provide tax advice so be sure to contact your tax advisor or financial consultant before opening or contributing to an IRA.

Learn How a Roth IRA Works with Synchrony Bank

For more information about Roth IRAs and how they work, call 1-844-345-5789 to speak to one of our savings representatives, or click here to open an account today.

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Sources:

IRS: https://www.irs.gov/publications/p590b/ch02.html#en_US_2016_publink1000231057

IRS: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

 


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