A Roth IRA (aka individual retirement account) is a retirement savings account that you can funnel money into with after-tax dollars. The idea behind a Roth IRA for young individuals who have 20-30 years of work ahead of them is to take advantage of the fact that while you’re still in a low tax bracket in your early years, yyou should reap the potential benefit of using after-tax dollars to save for a retirement that could potentially earn you tens of thousands of dollars by the time you retire. The account grows over the years tax free and when you retire, the distributions from the account is also tax free. In other words, you’re taxed up front when you make a contribution to a Roth IRA but come retirement age, you can withdraw from the account without having to pay any additional tax. It’s a great retirement account to utilize because if you open an account early in your career and make annual contributions to a Roth IRA, you’re giving the account time to reap the benefits of compound interest. Also, keep in mind that because you’re funding the account with after tax dollars, the contributions to the account are not tax deductible, meaning you can’t use your Roth IRA contributions as a tax write off.
The distribution from a Roth IRA begins at age 59 1/2. The annual contribution limit to a Roth IRA is $5,500 and for those above the age of 50, it’s $6,500. A great benefit to opening this retirement account is that you have an opportunity to withdraw your contributions to a Roth IRA irrespective of whether you reach the age of 59 1/2. In other words, you can take out whatever money you put into a Roth so as long as it has been open for at least 5 years. Not a bad deal, right? Not only do you have another retirement investment vehicle to save money in, but you also have the leeway of being able to take money out of it without being penalized!
However, there is one caveat. Any INVESTMENT earnings you receive from the Roth IRA is subject to 10% tax penalty. So, you can take out your principle without penalty but whatever investment gains you earned during the interim, you’ll have to pay a 10% tax on those earnings.
There are certain instances that can exempt you from being subject to this 10% tax penalty. They are:
- First time home purchase (up to $10,000)
- Paying for college for you, spouse, children, or grandchildren
- Paying for costs associated with sudden disability
- Paying for medical expenses that exceed 10% of your adjusted gross income if you’re under the age of 65. If you’re over the age of 65, the threshold is decreased to 7.5%.
I feel like I’ve been stringing you along because there’s one important thing I failed to mention at the beginning of this post. As a CRNA, with the salary that you will begin making, you will no longer qualify to contribute to a Roth IRA.
If you anticipate on making >$132K in a year as a single person, you will be unable to contribute to a Roth IRA.
If you make >$194K in year as a married couple filing jointly, you will be unable to contribute to a Roth IRA.
Fear not, there is still hope for you yet to contribute to a Roth. It’s a traditional to Roth IRA conversion. The way that this works is you can open a traditional IRA account and then after a day or two, you can convert the account into a Roth IRA account. Just know that when you convert a traditional to a Roth IRA, you will have to report the existing money in your traditional IRA account as your income, meaning you’ll have to pay taxes on your contributions to a traditional IRA.
For example, let’s say you have $10,000 saved up in a traditional IRA and you end up converting it into a Roth through Fidelity or whatever investment services company you’re using. You’ll have to report that $10,000 as personal income and pay taxes on that contribution before the conversion will go through.
The next question to this conversion is, where and how do I go about performing a traditional to Roth conversion? Well, depending on which investment services company you’re using, they all offer this option and you easily perform it on their website. I’m currently using Fidelity and it’s simple.