We've talked about pre-tax retirement contributions and the benefits of tax-deferred savings.
But what about tax-free savings? Enter the Roth contribution.
Some employer-sponsored retirement plans allow you to make Roth contributions. These contributions are made with after-tax dollars meaning that your employer takes them out after they've been counted as income to you. Yes, you are taxed on that income in the year you receive it, however, your Roth contributions grow in your retirement plan tax-free. You can withdraw your contributions at any time without tax or penalty. The IRS views that as your money because you’ve already paid taxes on it.
Withdrawals are tax-free if they are considered qualified. Withdrawals are considered “qualified” if you have had the Roth IRA for at least five years and the withdrawal is taken:
- When you are at least age 59 ½
- Because you have a permanent disability
- To purchase, build, or remodel your first home (a $10,000 lifetime maximum applies), or
- By a beneficiary or your estate after your death
Have a great weekend Savvies!
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