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How to decide if you can use a Roth IRA: Covering the basics.

How is a Roth IRA different from a traditional IRA?

You might have a vague idea of what a Roth IRA is, but haven’t had the time to sit down and really hash out the details and learn how it differs from a traditional IRA. Well, let’s get started.

What is a Roth IRA?

A Roth IRA is an individual retirement account that lets you accumulate funds that can be withdrawn potentially tax-free when you retire.

How does it differ from a traditional IRA?

Traditional IRAs also are designed to help you save for retirement. However, the accumulations in a Traditional IRA are tax deferred, meaning you’ll have to pay federal income tax to the Internal Revenue Service (IRS) when you withdraw from a traditional IRA at retirement. A 10% penalty tax may also apply to early withdrawals. With a Roth IRA, your contributions are made on an after-tax basis, and you can withdraw your contributions on a federal income tax-free basis. You can make qualified withdrawals on the earnings in your Roth IRA free of federal income taxes and tax penalties after you turn 59½ years old and at least five years have passed since you first began contributing to the Roth IRA account.

Furthermore, while you must make mandatory withdrawals from a traditional IRA beginning at age 70½, there are no required withdrawals for Roth IRAs while you are alive.

Who is eligible for a Roth IRA?

Roth IRAs are available to just about everyone, provided their income isn’t above a certain threshold. The limits for 20141 are as follows:

  • Single: $114,000 or below.
  • Married filing jointly: $181,000 and below.

These limits apply to the amount of money you can contribute to your Roth annually. For the 2014 tax year, the maximum contribution is $5,500 ($6,500 if you are 50 or older).

The limits for 20151 are as follows:

  • Single: $116,000-$131,000.
  • Married filing jointly: $183,000-$193,000.

There are advantages to opening a Roth when you’re younger, since you might be in a lower tax bracket and will have more years ahead of you to save. However, you can still contribute to a Roth IRA even if you’re pushing the upper limits of the contribution restrictions. If you’re single and make between $114,000 and $129,000 or married filing jointly and earn between $181,000 and $191,000, the contribution limit is eventually phased out.1 Earn more than this, and you can still keep the account; you just cannot contribute any more money to it.

How do contributions work? Do I have to put the yearly maximum in all at once?

You can certainly do that. In fact, some people are able to use their annual tax refund as an IRA contribution. But you can also contribute throughout the year. You can even have a certain amount of money withdrawn from your bank account automatically and transferred to your Roth IRA account monthly. And remember, in order to make a Roth IRA contribution you must have earned income.

And remember, in order to make a Roth IRA contribution you must have earned income.

Where do I open a Roth IRA?

You can open a Roth IRA with your New York Life Agent or NYLIFE Securities Registered Representative. Discount commercial brokerages, banks, and other financial services companies also offer Roth IRAs.

How does a Roth IRA accumulate earnings?

You can take as much or as little risk as you wish with the money you invest in a Roth. You can invest Roth IRA contributions in stocks, bonds, mutual funds, certificates of deposit, annuities, or real estate. The choice is yours.

But I have a 401(k). How different are they? They are very different and subject to different sets of rules and limitations.

Although both help you save for retirement, with a 401(k), your contributions are generally made on a pretax basis. When you retire, you have to pay ordinary income taxes on your contributions and earnings. With a Roth IRA, you’ve already paid the taxes on your contributions and can enjoy the money you’ve accumulated federal income tax free when you retire, provided you’ve met applicable requirements.

That’s not to say one savings instrument is better than the other. 401(k)s and Roth IRAs complement each other nicely in a retirement portfolio.

When can I withdraw money from my Roth IRA?

You can withdraw your contributions at any time with no penalty or taxes. If you withdraw earnings from the Roth IRA account before you’re 59½, then you may get hit with a tax bill and a 10% early withdrawal penalty tax, unless an exception applies. And remember. At least five years must have passed since you first began contributing to a Roth IRA account to make your first withdrawal.

Did you know you can use your Roth IRA to help pay for a new home?

The IRS lets first-time homebuyers withdraw up to $10,000 from their Roth—including earnings—both tax and penalty tax free to put toward a new house. The $10,000 is per person, so a couple could withdraw up to $20,000 (assuming each spouse has a Roth IRA) for a first home.1 And, you’re not required to pay it back. But there is a caveat: the money must have been in the Roth IRA for at least five years.

This article contains a discussion of a tax-related topic. The discussion is general, if not universal, and designed to provide educational information about Roth IRAs. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding IRS penalties which may be imposed upon a taxpayer. Taxpayers should always seek the advice of their own independent tax professional regarding their individual circumstances. New York Life Insurance Company and its Agents may not provide personalized tax or legal advice to you.

1October. 23, 2014, IRS News Release IR-2014-99. “IRS Announces 2015 Pension Plan Limitations; Taxpayers May Contribute up to $18,000 to their 401(k) plans in 2015.”;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401%28k%29-plans-in-2015