8 Things to Know About Roth IRAs

investing retirement

The Bible teaches us that preparing for the future is a wise decision (Proverbs 6:6-8). In this day and age, wisely preparing for the future often involves exploring various investment vehicles. One option that continues to gain popularity is the Roth IRA. This retirement savings account comes with a unique set of benefits and considerations.

Let's look at eight crucial aspects of Roth IRAs that every steward should know.

1. Tax advantages.

The primary allure of Roth IRAs lies in their tax advantages. Contributions to a Roth IRA are made with after-tax dollars, meaning there are no immediate tax benefits. However, stewards will experience some significant benefits during retirement. Qualified withdrawals, including earnings, are entirely tax-free. This provides stewards with a valuable tool for tax-efficient retirement income.

2. Income limits.

While Roth IRAs offer amazing benefits, not everyone can contribute due to income limits. For the tax year 2023, single filers with a modified adjusted gross income (MAGI) exceeding $153,000 and married couples filing jointly with a MAGI over $228,000 may face reduced or restricted contribution limits. It's crucial to stay informed about these thresholds, as they can impact your eligibility. These limits will increase in 2024 to $161,000 and $240,000, respectively.

3. Contribution limits.

Understanding the contribution limits is essential for effective retirement planning (when you no longer work for income). In 2023, the maximum annual contribution to a Roth IRA is $6,500 (or $7,500 for those aged 50 or older). These limits are subject to change, making it imperative for stewards to stay abreast of the latest updates to maximize their contributions. For 2024, the limits increase to $7,000 and $8,000, respectively.

4. No required minimum distributions (RMDs).

One standout feature of Roth IRAs is the absence of Required Minimum Distributions (RMDs) during the account holder's lifetime. This flexibility allows investors to tailor their withdrawal strategy to meet their unique financial needs. It's a powerful retirement and estate planning tool, providing control over the timing and amount of withdrawals.

5. Early withdrawal rules.

While contributions to a Roth IRA can be withdrawn at any time without penalty, tapping into earnings before reaching age 59½ may trigger taxes and penalties—unless the withdrawal is for a qualifying reason, such as a first-time home purchase or specific education expenses. Stewards must know these rules to make informed decisions about their financial future.

6. Conversion opportunities.

Roth IRAs open the door to strategic financial moves, such as converting traditional IRAs into Roth IRAs. However, this process comes with a tax implication—taxes are due on the converted amount in the year of conversion. Stewards can leverage conversion opportunities based on their current and future tax situations, making it a valuable tool for long-term financial planning.

7. Investment options.

Roth IRAs offer diverse investment options, ranging from stocks and bonds to mutual and index funds. The specific choices available depend on the financial institution holding the account. This flexibility empowers investors to create a well-rounded portfolio aligned with their risk tolerance and financial goals.

8. Spousal contributions.

Roth IRAs recognize the importance of spousal collaboration in financial planning. Even if one spouse has minimal or no earned income, as long as the other spouse has eligible compensation, both can contribute to their individual Roth IRAs. This unique feature effectively doubles the household contribution limit, providing an excellent opportunity to maximize retirement savings.

As stewards of God's resources, we recognize the wisdom of saving for the future and leveraging financial tools, like the Roth IRA, to help us do so. Understanding the tax advantages, navigating income and contribution limits, and leveraging unique features like spousal contributions can help stewards prepare for the moment when they will no longer work for income.