No taxes (on earnings or qualified withdrawals)
That’s right. Your retirement savings account grows absolutely tax free and you won’t owe a dime when you start taking withdrawals as long as your follow the IRS rules. This is because Uncle Sam takes taxes out before you invest it. It’s like prepaying your taxes. The frosting on this cake is that you are not taxed on any account earnings. Hard to believe, I know. Don’t question it, just go with it.
That’s all you need to start a Roth IRA with WEA Member Benefits. Other providers may require $500 or $1,000 to open an account, but we think you should be able start with whatever you can afford. A comfortable retirement is an expensive proposition. But, starting sooner even with as little as $20 per pay period can make a significant difference in your financial future.
A Roth IRA is also more flexible than other retirement savings. Although the purpose of a Roth IRA is to save for retirement—long-term savings—access to your contributions is much easier than say in a 403(b) or 401(k) account. However, withdrawing from your account is not recommended because your money needs to be in the account so it can grow, but if you have an emergency and have no other options, it’s nice to know it’s there.
NOTE: Contributions is italicized in the previous paragraph for a reason. Withdrawing any of your earnings before age 59½ will trigger a tax bill on the money, plus you’ll have to pay a 10% penalty. So you won’t want to do that. Unless…you want to tap your Roth for either of these two reasons and qualify.
- To buy your first home. If you use your Roth IRA for a first-home purchase, in addition to using your contributions for the down payment, you can also withdraw up to $10,000 of earnings tax- and penalty-free if the account has been open for at least five years. Even if you fail the five-year test, the withdrawal will still be penalty-free, but you will have to pay tax on the withdrawn earnings. The $10,000 limit is per person, so couples could withdraw up to $20,000 of earnings if they each have a Roth IRA.
- To pay for college. Many parents don’t know whether to save for retirement or their child’s college tuition. Retirement always wins that debate. There are lots of finance options for a college education; for retirement, not so much. A Roth IRA is a great way to cover plan for either. Focus on your retirement now, saving as much into a Roth as you can. And as your finances allow, consider opening a 529 plan, like Wisconsin’s Edvest. When the tuition bill comes due, you can see where you’re at.