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What is a Roth IRA?

May 09, 2019 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What is a Roth IRA?

Are you behind in saving for retirement? If so, you’re not alone. One-third of Americans say they haven’t saved anything for their golden years. And more than half have saved less than $10,000. The numbers are even bleaker for millennials: Two-thirds have nothing at all saved for retirement, and one-third have employers that don’t even offer retirement plans.

If you don’t have much, or anything, saved up, it’s understandable. Most Americans today are dealing with rising levels of student debt and the ballooning cost of housing, childcare, and healthcare. So, it makes sense that you wouldn’t have much extra left over at the end of the month. But it’s never too late to get your retirement savings on track.

If you’re wondering where your retirement fund should be, a retirement calculator can help you figure out how much money you should be saving based on your current age, income, and estimated retirement age. This is probably the single biggest investment you’ll make in your life, so the more time you have to let your money grow, the better.

If you’re ready to start saving for retirement, letting your money sit in your savings account might not be the solution. A smart option for retirement savings is an investment account so you can grow your money over time. A Roth IRA is a retirement vehicle that about 36% of households contribute to. Here’s what you need to know about what a Roth IRA is and whether it’s the right investment account for you.

Understanding Roth IRAs

A Roth IRA is a type of account that lets you put away money for retirement, invest it in a variety of assets, and take advantage of tax benefits. The “IRA” part stands for individual retirement account. Unlike an employer-sponsored 401k plan, you can open a Roth IRA directly with many financial institutions.

As of 2019 , you can put up to $6,000 a year into a Roth IRA, or up to $7,000 if you are at least 50 years old. You contribute to a Roth IRA with after-tax income, so your contributions are not tax-deductible.

Since you’ve already paid tax on the money, you are usually able to withdraw your contributions without paying taxes or a 10% early withdrawal penalty. Though you should be aware that you’ll still incur a withdrawal penalty if you have had your account open for less than five years and are under the age of 59 ½.

You can, however, withdraw earnings prior to 59 ½ without paying a penalty or taxes in certain circumstances, as long your account has been open and you have been actively making contributions for at least five years:

•  You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.

•  You can withdraw money if you have a disability.

•  Your heirs or estate can withdraw money if you die.

Additionally, you can avoid the penalty, although you still have to pay income taxes, if you withdraw earnings for:

•  Medical expenses that exceed 7.5% of your adjusted gross income.

•  Medical insurance premiums during a time in which you’re unemployed.

•  Qualified higher education expenses.

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Roth IRA Eligibility

Not everyone can contribute to a Roth IRA. In order to do so, you must fall below certain income limits. Those limits are based on your MAGI , which is your adjusted gross income. For 2019 , here’s what you need to know:

•  If you’re single, you can contribute the full $6,000 to a Roth IRA if your MAGI is less than $122,000 and make a partial contribution if your MAGI is less than $137,000.

•  If you’re married filing jointly, you must earn less than $193,000 to contribute the full amount and less than $203,000 to contribute a partial amount.

•  If you’re married filing separately, you must earn less than $10,000 to contribute a partial amount.

If you earn less than the contribution limit, you can only put in up to the amount of money you made that year. And to have your contribution apply to a certain year for tax purposes, you must contribute by that year’s tax filing deadline in mid-April (no extensions).

Is a Roth IRA Right for You?

You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401k plan, or if you’ve already maxed out your contribution there. (If your employer offers to match your contributions to a 401k, it’s always your best bet to take advantage of that.)

How do you know whether you should contribute to a Roth IRA or a traditional IRA? With a traditional IRA, contributions are tax-deductible, but you then have to pay taxes on the funds you withdraw in retirement.

Using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open Roth IRA if you expect your tax bracket to be higher in retirement than it is today.

For most people, that often means contributing to a Roth IRA when you’re younger and earning less, since you might not qualify under the income limits later in life.

A Roth IRA can be a potential option if you want to avoid being forced to take money out of your account when you get older. With a traditional IRA, you have to take required minimum distributions starting at age 70½ or face a penalty. With a Roth, there isn’t a similar requirement,

Finally, a Roth IRA can be helpful if you think you’ll work past the traditional retirement age. That’s because you can keep contributing to a Roth IRA, but not to a traditional IRA, after you hit 70½. That’s a big perk when people are living and working longer than ever before.

Work With SoFi Invest®

If you are already taking advantage of your 401k and have opened a Roth IRA, consider investing with SoFi to complement your current retirement investments. You can open a SoFi Invest account with as little as $100.

There are no SoFi management fees. You’ll also have access to SoFi financial advisors who can work with you to determine your financial goals and can help you establish a plan.

It’s never too early—or too late—to start saving for retirement. See how an invest account with SoFi can help you meet your retirement goals.


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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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