Investing in your future years with Roth IRA is a good start to contribute more to your retirement years. What makes Roth IRA differ from the traditional IRAs is how they are taxed. Same as Roth 401(k), your Roth IRA contributions are taxed when you withdraw money.
Roth IRAs are funded with after-tax dollars, meaning you won’t pay taxes when you withdraw the funds.
This can be both a good and a bad thing for many so be wise to pick the right one for your future. The reason why most Americans choose traditional IRAs and 401(k) is they are taxed when withdrawn. So their contributions are not taxed at the time of their employment. This is because most Americans earn significantly less in their retired years compared to working years.
If the situation seems to be the exact opposite for you, Roth IRA is going to be the right option. Because you are likely to move into a higher tax bracket if you were to earn more in your retired years. Instead of opting for a traditional IRA, choosing Roth IRA will save you money as much as the marginal tax rate difference.
Maximum Roth IRA Contribution
First and foremost, aside from the contribution limit, make sure you’re eligible to contribute to a Roth IRA. If you earned more than $139,000 in 2020 as a single individual, you cannot make Roth IRA contributions. This limit is $206,000 for married couples.
There is also the spousal Roth IRA which gives more benefits overall. If your spouse earns significantly less than you or earns nothing, you can make contributions on your spouse’s behalf.
However, the rules for a spousal Roth IRA is more strict. To even begin with it, you must file your taxes on a joint return and must earn less than the income limit. The individual Roth IRA contribution limit also applies to spousal Roth IRA so you won’t be able to contribute more than $6,000.
The maximum contribution you can make to your Roth IRA in 2020 is $6,000.
Just like the 401(k) contributions, Roth IRA contribution limit is higher if you’re over the age of 50. It grants an additional $1,000, making it $7,000 to the folks older than 50.