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The Roth Individual Retirement Account (IRA) is an all-important savings vehicle. All retirement accounts benefit from tax-deferred growth at the expense of flexibility, so that the Federal Government may encourage long-term investing. Take note of Roth IRA guidelines before integrating this tool within your financial plan.

Tax Deferral

Roth IRA contributions are made with after-tax money. From here, tax-deferred growth means that Roth IRA interest income, dividends, and capital gains will also be tax free. At age 59 ½, you may withdraw your full Roth IRA balance without penalty and without paying taxes.

The Roth IRA is the mirror image of the Traditional IRA. Traditional IRA contributions are tax deductible, and all Traditional IRA withdrawals are taxed as ordinary income.

IRA Contribution Limits

Most taxpayers may contribute a combined $6,000 and $6,500 into all Traditional and Roth IRA accounts for 2022 and 2023, respectively. Age fifty and over savers can make an additional $1,000 in annual IRA contributions.

Be further advised that IRA contribution limits phase down according to adjustable gross income and filing status. For 2022, married filing jointly taxpayers reporting at least $214,000 in adjusted gross income may not make any IRA contributions. Married filing separately taxpayers are severely restricted from retirement account contributions.

Roth IRA Withdrawals

Savers may withdraw Roth IRA investment principal at any time, without penalty. Investment profits, however, may be subject to the additional 10-percent penalty tax, if taken and withdrawn prior to age 59 ½.

Exemptions are made for total disability, healthcare, first-time home purchase, and qualified tuition expenses. Going forward, legislation is being floated to allow savers to take small, financial hardship withdrawals out of retirement accounts, without penalty.

Investment Strategy

A comprehensive financial plan will include Roth IRA, 401(k), and taxable brokerage accounts, which will allow for both tax-deferred growth and flexibility. Roth IRAs are particularly ideal for younger savers and professionals, who expect to retire in higher tax brackets.