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June 3, 2020, 10:02 a.m. EDT

All about the Roth IRA

Even if you can’t get one, you can use the backdoor

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By Blake Skadron


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Keep more of every dollar.

Does the name Sen. William Victor Roth Jr. mean anything to you? If you’re saving for retirement, then you should know and thank Roth. He was the sponsor of the 1997 legislation that created his namesake — the Roth IRA.

The Roth IRA is a retirement savings plan used by millions of people to build wealth over time. It’s a great way to save because it offers tax-free growth. That means the capital gains aren’t taxed every year in a Roth. And when you take money from a Roth in retirement, unlike a “traditional IRA,” that money isn’t taxed, so you have more of every precious dollar.

Some basic points:

• Investors use after-tax dollars (unlike a 401(k) that uses pretax money) to fund a Roth IRA account

• Roth gains are not taxed when withdrawn as long as the account has been established for 5 years and you are over 59½

• A traditional IRA is tax-deductible (for some income levels) when it’s funded, but later withdrawals are taxable

Click to Play

What's the difference between a 401(k) and a Roth 401(k)?

A deep look into the different retirement accounts available - 401(k), Roth 401(k), IRA, Roth IRA - and how to tell what's best for you.

What’s a conversion?

You may have heard of people “converting” to a Roth. Many people will convert retirement accounts such as a 401(k) or a traditional IRA into a Roth. For example, you leave your job and have $100,000 in a 401(k), you can convert it to a Roth IRA. You then owe taxes on the conversion because your 401(k) was built from “before tax” cash.

Conversions from traditional IRAs are treated differently, depending on the types of contributions you initially made to the traditional IRA.

Read: Retiring in bad times? Don’t worry about your investments

More flexible savings

Compared with traditional IRAs, Roth IRAs offer more flexibility. You can take out any contributions (the money you put in) at any time without penalty. Paying college bills or have an emergency? Use the Roth IRA contributions.

With the traditional IRA, there’s also “required minimum distributions” at age 70½. You must take out a minimum amount starting at that age. But what if your other investments, Social Security, or pension cover your expenses? This is another way the Roth is more flexible, as there are no required withdrawals at any age. You can let the money sit there and grow tax-free and contribute to the Roth at any age.

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