Regardless of your financial knowledge or situation, it’s wise to save money to invest in your retirement. The more you save now, the better off you will be once you reach your golden years. A recent survey found that 68% of those responding would advise their younger selves to save more money than they did. But knowing that you should save isn’t as helpful as knowing how you should save. 

There are a few different saving options available to you depending on your place of employment, age, and income level. The three main options are a 401(k), traditional IRA, or a Roth IRA. 

For this article, we’ll focus on Roth IRAs and some of the misinformation surrounding them. Saving for retirement seems complicated, but it doesn’t have to be. As financial advisors in Boston, we hear some common misconceptions/myths about Roth IRAs and Roth IRA eligibility.  Here are some of the myths surrounding Roth IRAs and the facts to debunk those myths. 

Myth: It’s Possible to Earn Too Much Income to Have a Roth IRA

If you are a single tax filer and make $125,000 a year or more, or are a married couple filing jointly and make $198,000 or more together, then you aren’t allowed to open a Roth IRA straight away. What you can do is create one through a Roth IRA conversion. This transaction is a legal and complicated process that will still require you to pay some taxes on the converted portion, but no early withdrawal penalties like you would on a typical IRA withdrawal. But, with the help of investment professionals, it will still allow you to get into a Roth IRA. You can either convert an existing IRA, or do a “backdoor Roth” IRA, allowing you to contribute to a Roth IRA even if you’re over the income limit.  

Myth: You Aren’t Allowed to Take Money Out of Your Roth IRA Before Age 59.5

One of the nice things about a Roth IRA is that the money that you originally put into the account (the principal) is available for withdrawal without a waiting period, taxes, or penalties, at any age – the same cannot be said for earnings on investments. However, with these earnings, you can’t pull the funds until after age 59.5, and you must have created the account over five years before. 

Pulling investment out earnings early will accrue penalties, with some exceptions. One of these exceptions is for the purchase of your first home. Provided that you made your first contributions to the Roth IRA more than five years ago, you can withdraw up to $10,000 of principal and investment earnings without triggering taxes or penalties. This exception applies to your spouse too, if you have one, so he or she can also withdraw $10,000 to bring your total up to $20,000 of tax and penalty-free money that you can use to buy your first house.

Another exception is if your Roth IRA was a conversion. If that’s the case, you are forced to wait five years from each conversion to withdraw the principal without penalties.

Myth: You Have to Start Withdrawing Money at a Certain Age, or Face Penalties

With a traditional IRA, you have to begin withdrawing money at age 72 (these are called required minimum distributions) or face stiff penalties (50% on the amount you failed to withdraw). The Roth IRA is a whole different ball game. You are free to keep your money in your Roth IRA for as long as you are alive without being forced to withdraw the money at any point. This can prevent you from being forced to sell your investments in suboptimal market conditions. 

Myth: You Can’t Contribute to a Roth IRA if You Don’t Have Earned Income

With some exceptions, if you are a single tax filer, this is true. But if you are married and your spouse has an income, the IRS allows you to contribute to an account called a spousal IRA, which functions just like a Roth IRA. The difference is that your spouse’s income is used to determine whether you qualify for this Roth IRA. This is a nice perk for families who want to double the amount of money they put away for retirement because each spouse can contribute up to the limit for each year.

Roth IRA Eligibility

Several factors dictate whether or not your Roth IRA eligibility. Here are some of those factors:

• You have earned income or a spouse who does.
• You make less than $125,000 a year as a single tax filer or less than $198,000 as a couple filing jointly.
• You receive income treated as earned income for Roth IRA purposes like untaxed combat pay, military differential pay, or taxed alimony.

You’ll notice that there’s no age requirement for a Roth IRA. If you have children and have earned income, even if they are under age 18, they can also contribute to an IRA. They just need an adult to set up a custodial Roth IRA for them. Conversely, someone over the age of 70 can continually contribute to their Roth IRA. 

Roth IRA – A Great Investment Vehicle

Even though there’s a lot of misinformation about investing and retirements out there, the truth is that a Roth IRA is one of the best investment vehicles that you can contribute to. Its tax-free nature and lax withdrawal rules make it an option on-par with or possibly even superior to a traditional IRA. Whatever line of work you’re in or how old you are, you should consider opening a Roth IRA today. You’ll be glad you did. 

Be sure to check out my video on the Tax Control Triangle and learn why it’s important to strategize your holdings to match life goals, regardless of age.