Alli Thomas 
One of the most recent additions to the list of retirement investment options, the Roth IRA, was established 25 years ago by the Taxpayer Relief Act of 1997.
While there are many similarities between Roth and traditional IRAs, there are many important differences to keep in mind when deciding how to invest.
Here are seven important details you need to know about the Roth IRA:
Roth IRA Contributions Are Not Tax-Deductible But Grow Tax-Free
Unlike contributions to traditional IRAs or 401(k)s, contributions to a Roth IRA are made post-tax – that is, after you already paid taxes on that income. But while Roth IRA contributions are not tax-deductible, the growth of these contributions is tax-free.
You Can Withdraw Roth IRA Contributions Out at Any Time
While contributions to tax-deferred accounts like a traditional IRA typically can’t be withdrawn without paying taxes and a penalty, Roth IRAs offer penalty-free and tax-free withdrawals of contributions at any time.
Roth IRA earnings are subject to withdrawal restrictions, however. In general, the only way to avoid taxes and penalties is to be over 59 ½ and the Roth IRA account has to be at least five years old. If you’re 59 or under, there are qualifying exemptions that may allow you to avoid withdrawal penalties, but you will still be subject to taxes if you had the account for less than five years.
If your financial plan involves relying on your retirement savings to get you through a pre-retirement financial emergency, you should have a Roth IRA as part of your portfolio.
There’s No Age Limit For Contributions
As you approach and enter retirement age, the government begins to curtail your ability to contribute to tax-deferred accounts. With traditional IRAs, for example, you’re no longer able to make contributions after you turn 72. With a Roth IRA, you can keep contributing as long as you’re able, regardless of age.
There Aren’t Any Distribution Requirements
Because it wants to get its hands on all that deferred tax revenue, the government forces retirees to start taking distributions from tax-deferred retirement accounts starting at age 72. This is not the case for Roth IRAs, which are not subject to any distribution requirements.
As a result, it’s possible to keep making contributions to your Roth IRA without ever taking out a single dime. And as long the account for at least five years and has a qualified beneficiary named, the full amount would be inherited tax-free.
Annual Contribution Limits Are Fairly Low
The one significant downside of the Roth IRA is that you can’t contribute all that much. For 2022, you can contribute up to $6,000 to your Roth IRA. If you’re 50 or above, you can contribute another $1,000 for a total of $7,000.
If you’re married and file taxes jointly, you can establish a Roth for a non-working spouse. This effectively doubles the amount you can contribute within a tax year. Over time, this can add up to significant savings for you and your spouse.
There Is an Income Cap
Though the only requirement for opening a Roth or making contributions is that you need to have income, you can’t have too much income, either.
Eligibility to contribute to a Roth IRA begins to phase out at higher income levels. For the 2022 tax year, contribution eligibility begins to phase out at $204,000 for joint filers and $129,000 for single filers. The limit drops to $0 when income exceeds $214,000 and $144,000, respectively.
Higher earners can still get many of the benefits of a Roth IRA through alternative strategies like “the Rich Person’s Roth” or by converting a traditional IRA through a process known as the “backdoor conversion.”
Earn too much? Sneak in the back door.
As mentioned above, there’s a workaround for the Roth IRA income limit known as the “backdoor conversion.” This allows a traditional IRA holder to convert their account into a Roth IRA even if they’re above the income limit for contributions.
The catch is that you’ll have to pay taxes on the amount being converted. It may also increase your taxable income in the year of the conversion, further increasing your tax liability.
Additionally, the converted funds are considered Roth IRA earnings, not contributions, so you’ll want to have to wait five years from the date of conversion to withdraw them without paying a penalty.
Because of the tax implications, if you’re interested in executing a backdoor conversion, it should be done as part of a strategic retirement plan that takes these details into consideration.
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