As a working adult, you likely have countless responsibilities and obligations that you must attend to on a daily basis. Although it is quite easy to get caught up in short-term planning, taking the time to assess your current preparation for retirement is absolutely essential. Given the fact that retired adults are living longer than ever before, making sure you have a healthy financial reserve is an absolute necessity.
Taking the time to explore your IRA investment options will ensure that you have the knowledge and guidance you need to craft an effective plan for your retirement that will sustain you throughout your golden years. If you are ready to get started funding your Roth IRA, you may be pleased to know that there is no designated minimum deposit required.
If you are interested in setting up a Roth IRA for your future retirement funds, you can do so quite easily. Roth IRAs do not require a specific minimum deposit in order to be created, although your first contribution cannot exceed the annual limit.
Exploring IRA Investment Options
Thanks to a variety of retirement opportunities and programs available through employers and the marketplace itself, individuals can begin constructing a strategic plan for retirement at an early age. An individual retirement account, or IRA, is one such tool. Unlike an employer-sponsored pension plan, IRAs allow individuals to develop their own unique retirement plan built around annual contributions made at their own pace.
Unlike a conventional IRA, a Roth IRA is funded by after-tax contributions. Although this may initially seem like a weakness of the Roth IRA, the fact that tax has already been paid on these contributions means that they can be withdrawn during retirement tax-free.
Evaluating IRA Taxation
For the majority of individuals, the traditional IRA and Roth IRA are the two most popular and convenient retirement account options available. The primary distinguishing factor between them is the manner in which deposits are taxed. As mentioned previously, Roth IRA contributions are taxed prior to entering your retirement account. In traditional IRAs, however, contributions are taxed upon withdrawal.
Although it may seem somewhat frustrating to pay tax on your Roth IRA contributions prior to depositing them, there exists a distinct advantage in doing so. Given the fact that traditional IRA contributions are taxed at your ordinary income rate, the chances are good that you will pay more taxes on your withdrawals than you will on Roth IRA deposit. This is primarily due to the fact that individuals tend to earn more income as they age.
You may be able to pay tax at a significantly lower rate on Roth IRA deposits due to your reduced income level compared to withdrawals toward the end of your career when you have either reached your peak income or are deriving income from a funded pension. Compared to a traditional IRA, the Roth IRA features an identical maximum annual deposit amount of $5,500 in 2017. However, upon reaching the age of 50 individuals can begin depositing an additional $1,000 for a grand total of $6,500. There is also no minimum IRA contribution.
Opening a Roth IRA – The Basics
If you are ready to open a Roth IRA, you can do so using any large brokerage firm or banking institution. Depending upon the specific service you use, you may encounter a variety of rules and regulations relating to operational fees or regular deposit requirements. Generally speaking, there is no minimum balance required in order to begin funding a Roth IRA.
Whether you are prepared to deposit $100 or $1,000 dollars, you can do so without incurring any penalty or fee. That being said, you must still adhere to the annual limits for maximum contributions, meaning your initial deposit will not be able to exceed $5,500.
Depending upon the particular IRA provider you use, you may be required to schedule regular deposits into your account in order to avoid paying maintenance fees. Keep in mind, however, that your ability to deposit funds in your Roth IRA account will become somewhat limited when you reach specific income levels. For example, if you are a single filer on your tax return and you earn more than $135,000, you will not be able to contribute to a Roth IRA. Reductions in your deposit maximum will begin once you reach an annual income of $120,000.
Other Filing Status Considerations
If you are married and filing jointly, your combined income cannot exceed $199,000 in order to retain the ability to deposit income in your Roth IRA. Married couples will see their deposit maximum begin to phase out when their income level reaches $189,000.
For future planning, it is worth noting that these income limits will increase for tax year 2019. Single filers will be able to continue to deposit funds in their Roth IRA until their income exceeds $122,000, at which point options will begin to phase out. For married couples filing jointly, income cannot exceed $193,000 before phasing out begins. To review, there is no Roth IRA minimum deposit requirement, although there are strict limits on maximum contributions. There are also limits on the amount of income individuals can earn before Roth IRA contributions are off limits to them.
Evaluating Your Roth IRA Alongside Pensions
If you have an employer-sponsored pension plan, you can still contribute to a traditional or Roth IRA as you see fit. There is no need to curtail either of these valuable retirement resources in favor of the other, as they are both capable of working together jointly to provide you with a superior financial platform for your retirement.
If you have any further questions about your Roth IRA or traditional IRA, it is in your best interest to consult with a financial professional at your earliest convenience. The earlier you can deposit your funds in a Roth IRA, the greater gains you will likely see over both the long and short term.
During tax filing season, it is imperative that you file the appropriate forms in order to fully document any and all contributions you have made to your IRA. You can use IRS Form 5498 in order to document all contributions you have made to your IRA throughout the taxable year. Regarding contributions made to a Roth IRA, you can use Box 10 on Form 5498 in order to document the contributions you have made to this specific retirement account throughout the year.
Taking Note of Deadlines
It is essential that you do not confuse the contribution deadline for a traditional IRA with that of a Roth IRA. While traditional IRA contributions can be made up until the tax filing deadline and still be reported on the prior year's tax return, this is not the case for a Roth IRA. Any and all contributions to a Roth IRA must be made before the end of the year in order to be accounted for on your tax return. With a bit of guidance and thorough research, you can create and contribute to a Roth IRA which will provide you with the funds you need once you decide that retirement is your best step moving forward.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.