How Does a Roth IRA Work? [+Alternatives]

Roth IRAs can be an excellent tool for retirement savings in certain situations. A Roth IRA has the unique feature of tax-deferred growth and income tax-free distributions. 

Roth IRA Income Limits

If an individual’s modified AGI is over $124,000, their Roth IRA contribution limits are reduced. For those filling jointly, the modified AGI limits are $206,000 and reduced contributions at $196,000. 

Roth IRA Contribution Limits

If your income limits meet the eligibility requirements, there are contribution limits for the year. Those that are eligible to contribute are capped at contributions of $6,000 per year ($7,000 if you are over age 50) in 2020.

When You Have Access To Your Roth IRA Money

The three main eroding factors of any retirement account are taxes, volatility, and account/management fees. Therefore, the Roth IRA eliminates the eroding factor of taxes, provided that the Roth IRA owner is at least 59 ½ years of age AND has held the account for a minimum of 5 years.

Your Roth IRA is funded with after-tax dollars. With a traditional IRA, you receive a tax deduction in the year you contribute and kick the tax bill down the road until later in life. 

Roth IRAs And Taxes

A potential drawback is that many Roth IRA accounts are usually tied to stock market investments, which can be volatile and risky. These investments can include high fees that may erode a large portion of earnings. 

Roth IRA Drawbacks

Imagine you open a Roth IRA at age 25 with $1,000, and you contribute $6,000 per year until age 59. Now we will pretend you earned 5% per year for those 34 years. This would give you an account value of $515,655.13 at age 59. 

A Real World Retirement Example

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