Money Talks, So Should You

Q&A: 5 secrets about Roth IRA’s

Steve Doster
by Steve Doster, The Garrett Network  (@dosterfinancial)

Most people know that Roth IRA’s are funded with after-tax money.

Lots of folks also know that all those years of investment gains are tax-free when the money is eventually taken out of the Roth IRA during retirement.

READ: Will a Roth IRA help fund my child's education?

Now here are five quick secrets about Roth IRA’s to tell only your close friends:

Secret #1: Roth IRA contributions can be withdrawn at any time without penalty or taxes. Take note that it’s only the “contributions” that can be withdrawn without penalty. You have to leave any investment earnings in the Roth IRA until age 59 ½.

Secret #2: First-time homebuyers can withdrawal up to $10,000 of investment earnings without penalty or taxes if the money is used to buy that first home. The one important rule is that the Roth IRA has to be open for at least 5 years for the $10,000 to be tax-free.

Secret #3: The IRS considers a “first-time home buyer” as anyone who hasn’t owned a home in the last two years.

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Secret #4: If you exceed the income limits to make Roth IRA contributions and you do not have an IRA, then you can do what’s called a “backdoor Roth strategy”. Make a non-deductible contribution to a traditional IRA. Wait at least 30 days and then do a Roth conversion. This only works if you don’t already have an IRA! Repeat this strategy every year.

Secret #5: Roth IRA’s don’t have Required Minimum Distributions (RMD’s). When you turn 70 ½, the government forces you to begin withdrawing money from your 401(k)’s and IRA’s so the IRS can collect taxes on that money. Roth IRA’s don’t have this RMD requirement allowing the money to continue growing tax-free.

 

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Steve is president and founder of Doster Financial Planning, a commission-free firm based on San Diego, CA. He is a CERTIFIED FINANCIAL PLANNER™ professional with an MBA fom Arizona State University and a BS in mechanical engineering from the University of Arizona. Steve is proud to say he doesn’t sell financial products or earn commissions on the advice he provides to clients. His primary goal is to educate people to understand and select the best ways to achieve their unique financial future.