Investment Strategies

Investments in Roth IRAs are quite simple to understand despite what financial ads that run during major sporting events would lead you to believe.

Roth IRAs are for people who have an income of up to $112,000 per year or married couples who earn up to $178,000. What’s great about a Roth IRA is that you do not have to pay taxes on it. No matter how much your investments accumulate, Uncle Sam doesn’t see a nickel of it.

There are several ways you can invest in a Roth IRA. You can set up a Roth IRA as a mutual fund, buy bonds or even invest in real estate. However, as of 2014, you can only invest up to $5,500 per year—$6,500 if you’re over 50 years old. It’s also important to note that you have to earn an income to be able to contribute.

To make investing easier, set up automatic investments to be deducted from your account. This will help you not forget as well as take away any temptation to skip a payment here or there.

How The IRS Handles Roth IRAs

As of 2014, the IRS allows you to contribute up to $5,500 in a tax year if you are under the age of 60—if 60 or older, you can contribute an additional $1000 in order speed up the investments since the window of doing so is closing. In order to contribute the max, those filing individually need to earn a minimum of $5,500 from working and have an adjusted gross income under $114,000 ($181,000 jointly). You can also contribute on behalf of your spouse basically doubling the max contribution and earnings thresholds. You can expect to pay a six percent fee though as it’s seen as a contributions that exceeds the max.

Taking Funds Out

Funds can be taken from the Roth IRA at any point of the duration of the investment. However, this is situational and penalties and taxes may be applicable.

When To Take Funds

The optimal time to take funds from your Roth IRA is when the situation meets the following criteria:

• The account is 5 years old

• You’re older than 59 and a half, or you’re disabled, or the funds are for your first home and this limited to $10,000 through the life of the investment.

• If you were to pass away the funds are available to heirs.

Meeting this criteria allows you to take from the fund without penalty or taxes.

When Not To Take Funds

Taking funds from your Roth IRA before you’ve met the above criteria can lead to having withdrawals taxed at 10 percent. Generally, this means taking it out before you’re old enough—59.5.

However, the following may allow you to make withdrawals without being taxed 10 percent:

• The IRS has levied against the plan

• After losing your job and having to pay for medical expenses

• You take less than what you spend on higher education

• You’re uninsured and need to pay for medical bills

• Buying a home for the first time

• The owner of the Roth IRA has passed away

All withdrawals though are subject to the 10 percent tax For example, you’re buying your first home but the account is not 5 years old.

Requirements Around the Order of Withdrawals

For withdrawals that do not meet the qualifications, the withdrawal is subject to taxation.

• You make regular payments

• Payments that are made via conversions

• Earnings on the investment on payments

Note that rollovers are not considered for this set of requirements.

Roth IRAs for The Deceased

Roth IRAs are distributed amongst heirs and are not taxed as long as the account meets the qualifications. For example, if the account is not 5 years old, the withdrawals is subject to tax—however, the penalty is not incurred. A spouse though can convert the IRA into their own Roth IRA. Doing so allows the IRA to meet the qualifications such as maturing to the 5 year criteria and remains prevents the investment from being taxed.