When it comes to Roth IRAs, many factors come into play, making it difficult to understand the ins and outs of the process. To compound the issue, many old myths and misconceptions still linger around, confusing people on the best ways to go about managing their Roth IRA. In this article, we’ve debunked five common myths associated with Roth IRAs.
Myth 1: Roth IRAs are for the wealthy only.
The fact is, anyone can open a Roth IRA account and start saving for retirement, regardless of their income. Roth IRAs have eligibility requirements, but these requirements are quite lenient, as even high-income earners can still qualify by using a backdoor Roth conversion.
Myth 2: Roth IRAs are not tax-deductible.
No, Roth IRA contributions are not tax-deductible. However, investment gains in a Roth IRA are completely tax-free if you follow the withdrawal rules. This means that, in the long run, Roth IRA might be the better option since you don’t have to pay taxes on your earnings.
Myth 3: You can’t withdraw money before retirement.
False. Although withdrawing funds before retirement can cause you to incur penalties, it’s not entirely forbidden. There are certain circumstances that allow you to make withdrawals without incurring penalties. These circumstances include, but not limited to: being 59 1/2 years of age, enrolling in a college program, buying a home for the first time, having to pay medical expenses and facing RMD requirements.
Myth 4: Your money is stuck in a Roth IRA
This is entirely false. You can transfer the money you have in your Roth IRA to another account such as a traditional IRA or your company’s 401(k) plan. It’s also worth noting that you can always withdraw your contributions penalty-free.
Myth 5: Roth IRAs cause an increase in income taxes
Roth IRA contributions don’t have a direct effect on your taxes. In other words, contributing to a Roth IRA won’t necessarily increase your income tax bill. Roth IRAs allow you to pay taxes on your contributions beforehand, ensuring that when it’s time to start withdrawing, you’ll do so tax-free.
In conclusion, it is essential to separate fact from fiction when considering starting or managing a Roth IRA. Once you’ve fully understood the ins and outs of the process, you can take advantage of it to secure a comfortable retirement.
