A Roth IRA is the greatest location for your investment dollars compared to any other location:
- Investments grow tax-free
- After a contribution has been made, after 5 years it can be withdrawn tax-free
- After age 59 ½, gains can be withdrawn tax-free
- Unlike a regular IRA, there is no mandatory withdrawal out of the account
- Heirs can make tax-free withdrawals, as long as they wait 5-years after the owner’s death
- Most importantly, when Congress talks about taxing retirement accounts, they do not include Roth IRAs because they have already been taxed once.
The primary use of this account is for retirement savings so it is best to begin contributing as soon as possible. Since the requirement is that contributions are limited to earned income, how can children get earned income? I know a Realtor who uses their toddler kids in advertisements so she pays them a modeling fee that is put into their Roth IRAs. All that is needed for earned income is a legitimate, arms-length transaction. If you don’t do this for them then they can begin to contribute when they earn money from a paper-route, baby-sitting, lawn-cutting, or other 10-14 year old activities to start their Roth IRA.
There are two limits for Roth IRAs: a contribution limit (today it is $5,500) and an income-limit (today it is $127,000.) However, there is a back-door to putting money into a Roth IRA to get around both of these limitations. Since 2010, you can contribute to a regular IRA and then convert that IRA to a Roth IRA. You can do this each year that you have earned income.
What has been mentioned are the basic rules for a Roth IRA but there are many specific rules that you’ll need to follow from either the IRS website or your tax advisor. Be aware that that taxes are your biggest drag on both your income and net worth and the Roth IRA is the best location for you to avoid these over your lifetime.