What is a Roth IRA?

A Roth IRA is a retirement savings account that allows individuals to contribute after-tax dollars into their account. This means when you withdraw the funds at retirement age, you won’t have to pay any additional taxes on the earnings. 

Advantages of a Roth IRA

Tax-Free Withdrawals

One of the most significant benefits of a Roth IRA is that you can withdraw your money tax-free after age 59.5. This can be a significant advantage for individuals who expect to be in a higher tax bracket during their retirement years.

No Required Minimum Distributions

Another benefit of Roth IRAs is that there are no required minimum distributions (RMDs). This means that you don’t have to withdraw money from your account at a particular age. With a Traditional IRA, you must start taking distributions at age 72, which can impact your tax liability and retirement income.

Contributions Even After Age 72

Roth IRAs have no age limit for contributions, so individuals can continue to contribute to their account even after age 72. This is not allowed with Traditional IRAs, which have contribution limits based on age.

Disadvantages of a Roth IRA 

No Tax Deductions 

Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning you won’t get an immediate tax deduction for your contributions.

Contribution Limits

Roth IRAs have annual contribution limits, which may not be sufficient for individuals who want to save more aggressively for retirement. For 2023, the contribution limit is $6,500 for those under age 50 and $7,500 for those age 50 and over.

Income Limits

High-income earners may not be able to contribute to a Roth IRA or may only be able to contribute a reduced amount, depending on their income level. For 2023, single filers with a modified adjusted gross income (MAGI) above $153,000 and married couples filing jointly with a MAGI above $228,000 are not eligible to make any contributions to a Roth IRA.

Exceptions to Access Funds Without Penalty

If you withdraw any earnings from your Roth IRA before age 59.5, you may be subject to a 10% penalty, unless an exception applies (which we’ll discuss below). This flexibility can be especially helpful for emergencies or unexpected life events. To qualify for these exceptions, you must have owned the Roth IRA for at least five years.

It’s generally not recommended to withdraw money from your retirement accounts before age 59.5. Although there are some examples of when you can withdraw money from your Roth IRA before age 59.5 without incurring a 10% penalty. 

New Parent Child Birth Expenses 

Under the SECURE Act (Setting Every Community Up for Retirement Enhancement), which was passed in December 2019, new parents can withdraw up to $5,000 from their Roth IRA penalty-free in the year following the birth or adoption of a child you are the guardian to. 

This is a new exception that applies specifically to Roth IRAs.  For example, if your child was born in December 2022, you have until December 31, 2023, to withdraw up to $5,000 from your Roth IRA penalty-free.

It’s important to note that the $5,000 withdrawal limit applies to each parent separately. So, if both parents have Roth IRAs, they can each withdraw up to $5,000 penalty-free, for a total of $10,000.

First-Time Home Purchase

You can withdraw up to $10,000 from your Roth IRA penalty-free to help pay for the purchase of your first home. For married couples, the limit applies separately to each spouse. Meaning that the combined limit for a married couple is $20,000.

The funds can be used for the purchase, construction, or reconstruction of a first home for you, your spouse, or any of your lineal descendants. This includes your children, grandchildren, parents, or grandparents.

(If you’re buying your very first home, you count as a first-time home buyer by default. However, you might also count as a first-time buyer if you haven’t owned a home in the past three years.)

Higher Education Expenses

You can withdraw money from your Roth IRA penalty-free to pay for higher education expenses for yourself, your spouse, or your children. This includes tuition, fees, & books. Room and board may also qualify if the student is enrolled at least half-time.

There is no limit on the amount you can withdraw from your Roth IRA for qualified education expenses, but you may not withdraw more than the total cost of the education expenses.

Unreimbursed Medical Expenses

If you have unreimbursed medical expenses that exceed 7.5% of your adjusted gross income, you can withdraw money from your Roth IRA penalty-free to pay for those expenses. This includes expenses for medical care, dental care, and prescription medications.

The medical expenses must be incurred in the same year that you make the Roth IRA withdrawal. If you incurred medical expenses in a previous year, you cannot use those expenses to qualify for this exception.

Long Term Disability

If you become disabled long term and are unable to work, you can withdraw money from your Roth IRA penalty-free. You may be required to provide documentation to show that you have a qualifying disability. This can include medical records, doctor’s notes, or other documentation. There is no limit on the amount you can withdraw from your Roth IRA if you become disabled.

Closing remarks

It’s important to note that while qualified withdrawals from a Roth IRA are penalty-free, it’s generally not recommended to withdraw funds from your retirement account unless it’s absolutely necessary. 

Withdrawing funds early can impact the growth of your retirement savings and may cause you to miss out on potential tax benefits. This is why it’s important to consult with a financial advisor or a tax professional to determine the best approach for your specific situation.