Most people meet the conditions to open up a Roth IRA. You should be planning for your retirement, and the first step is determining what type of account you are eligible for and what type of account best fits your needs.
The only limitation on opening a Roth IRA is your adjusted gross income (AGI). If you are below a certain point, you can contribute the maximum amount to your Roth IRA. As your AGI increases above that cut off point, you will be able to contribute less than the maximum and eventually zero.
So what is the cut off point?
For single filers, the initial cut off point is $95,000. If your AGI is lower than this, you can make a full contribution each year. As your AGI approaches $110,000, you will be able to make smaller contributions. If your AGI is over $110,000 you are ineligible to contribute to a Roth IRA.
For married filers, the intitial cut off point is $150,000. The final cut off point is an AGI of $160,000.
To find out of you are eligible to contribute to a Roth IRA, estimate what your adjusted gross income will be and compare it to the cut off points above. If you are below the cut off point, you are eligible.
This leaves a more important question – should you open a Roth IRA?
There are two advantages of a Roth IRA over a traditional IRA.
First, the earnings and distributions are entirely tax free. You contribute to a Roth IRA out of your post-tax income, so you do not need to pay taxes on the distributions when you retire.
In some cases, this will provide no clear benefit over a traditional IRA. With a traditional IRA, your contributions are tax deductible but you pay taxes on your distributions. If you adjust your contributions and put those tax savings into your IRA, then there may be no difference in the amount of retirement income you get out of a Roth IRA or a traditional IRA.
However, your likely tax bracket when you retire can help you make a decision. If you are going to be in the same or a higher tax bracket, you would want to open a Roth IRA – pay the taxes now and have more money later. If you anticipate being in a lower tax bracket, the traditional IRA might be a better choice.
Another thing to keep in mind is that you can withdraw your contributions to a Roth IRA at any time. The money that you deposit has already been taxed, so there are no restrictions on it. This can be a boon for young investors, because you can start building a nest egg and still have access to a large portion of your savings.
First, esimate your AGI. If you’re eligible, a Roth IRA just might be the best choice for your retirement.