Roth IRA

What is a Roth IRA?

A Roth IRA is an individual retirement account, which is funded with after-tax dollars and permits tax-free withdrawals. First introduced through the Taxpayer Relief Act of 1997, this retirement account gets its name from Senator William Roth. Akin to traditional IRAs in many respects, Roth IRAs are available to employees independent of their place of employment. However, the Internal Revenue Agency (IRS) has made some strict distinctions with a Roth IRA, especially pertaining to tax regulations. As per the IRS rules, you are not permitted to deduct contributions to Roth IRAs on a tax return. However, a major advantage is that the IRS will not tax Roth IRA distributions upon retirement if you meet certain criteria.

Another advantage with this type of retirement account is that contributions can be made to a Roth IRA after 70 ½. Additionally, regulations have changed regarding withdrawals based upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It is important to note that the IRS does not require withdrawals from a Roth IRA until the account owner has died.

For 2020, total contributions for both Roth IRAs and traditional IRAs is $6,000. For individuals 50 years old and older, the limit is $7,000. Likewise, with other types of retirement accounts, Roth IRAs have a 10% early-withdrawal penalty on the funds, and 6% annual penalty tax on excess contributions to the account.

A Roth IRA offers numerous investment options, however, the IRA custodian may limit the sort of assets that you can choose from. It is important to note that the IRS does not permit funds from a  Roth IRA to be invested in physical assets such as precious metals bullion or real estate.

Roth IRA Rollover Rules & Limitations

Funds from a Roth IRA can be “rolled over” or transferred into another type of retirement account or between financial institutions within a period of 60 days, as per IRS rules. Additionally, funds can only be rolled over once in a 365-day period from a specific IRA. If you already own a Roth IRA, you can easily put that money into a self-directed IRA, like a Precious Metals IRA.

Essentially there are two ways to move money from your Roth IRA into another retirement account: either a rollover or a custodian-to-custodian transfer. If you elect to take distributions in cash prior to retirement, funds will be subject to a 10% penalty.

The easiest method moving funds from a Roth IRA into a self-directed IRA is via a custodian-to-custodian transfer. Simply open a self-directed IRA with a reputable, IRS-approved IRA custodian. This custodian then directly transfers the funds from the existing Roth into the new IRA. Thereafter, said custodian will invest the funds as per instructions that you have provided. With a custodian-to-custodian transfer, you never touch the funds and the money transferred is not subject to taxation.

Roth IRA vs. self-directed IRA vs. Other Retirement Accounts

The table below compares the various types of retirement plans. Please note that for the purposes of this comparison table, a Roth IRA and traditional IRA have identical advantages and restrictions.

Plan TypeSponsorshipRoth Option?Allows Precious Metals Stocks?Allows Precious Metals Bullion?Allows Other Alternative Investments
Precious Metals IRAIndividualYesYesYesYes
Traditional IRAIndividualYesYesNoNo
401(k)EmployerYesMaybeNoNo
SEP IRASelf-employed or Business ownerYesYesMaybeMaybe
Solo 401(k)Self-employedYesYesYesMaybe
Simple IRAEmployerYesYesMaybeMaybe
Money Purchase PlanEmployerNoMaybeNoNo
Profit Sharing PlanEmployerNoMaybeNoNo
457(b)Government or Non-governmental Tax-exempt Employer YesMaybeNoNo
SARSEPEmployerNoYesMaybeMaybe
Keogh PlanSelf-Employed or Unincorporated Employer NoMaybeNoNo
Thrift Savings Plan (TSP)Government or Armed Services EmployerYesNoNoNo
ESOPEmployerYesMaybeNoNo
AnnuityIndividualNoMaybeNoNo

Maybe” denotes where precious metals investment options are dependent upon the retirement vehicle provider.

Roth IRA Limits

For 2020, the Internal Revenue Agency (IRS) rules for contribution limits to a Roth IRA are the “total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed your taxable compensation for the year, if your compensation was less than this dollar limit”.

In addition, the IRS increased the “income phase-out range” for contributions to a Roth IRA, based on your income and filing status. For 2020, the phase-out range for singles or heads of households is between $124,000 to $139,000. Married couples who file together, the phase-out range is $196,000 to $206,000. Lastly, the income phase-out range is $10,000 or less, for individuals who are married but separately filing from their spouses.

Roth IRA Calculator

A Roth IRA can prove to be an excellent retirement investment choice because withdrawals are tax-free. There are numerous components that contribute to the amount of savings you set aside for retirement. Use this Roth IRA Calculator to determine how much you could potentially save.

Roth IRA Companies

Vanguard Roth IRA

Choosing to invest in a Roth IRA can be an excellent choice, considering that your hard-earned savings grow tax-free, plus distributions are not taxed during retirement. Of course, this provides essential peace of mind. A Vanguard Roth IRA offers over 3,000 mutual funds with no transaction fees, in addition to commission-free exchange-traded funds (ETFs). It’s important to note that a Vanguard Roth IRA does have a $1,000 required minimum investment for mutual funds kept within the account.

Fidelity Roth IRA

Fidelity has consistently been one of the highest-rated multinational financial services companies in the industry. Investment options with a Fidelity Roth IRA include over 3,500 mutual funds, stocks, bonds, and ETFs. Unlike other Roth IRA providers, a Fidelity Roth IRA has no required minimum investment, with the exception of mutual funds. You will also have access to a wide range of Fidelity research and investment tools with this retirement account.

Charles Schwab Roth IRA

A Charles Schwab Roth IRA offers thousands of mutual funds with either no or low required investment minimums and no transaction fees. Likewise, other investment options with this company’s Roth IRA include ETFs, stocks, bonds, and CDs. For those who opt for a Charles Schwab Roth IRA, you will have access to a variety of retirement planning tools, not to mention personalized investment strategies and assistance from top industry professionals.

 

Roth IRA FAQs

Opening a Roth IRA is very straightforward. Typically, IRA companies that offer traditional IRAs will likewise offer Roth IRAs. Here is what you will need to open a Roth IRA:

  • Government-issued photo ID
  • A Social Insurance Number
  • The routing number of your financial institution, and your checking or savings account number
  • The name of your beneficiary or beneficiaries who will inherit the Roth IRA, and their respective Social Insurance Numbers.
  • The Roth IRA is named after Senator William Roth, and was introduced through the Taxpayer Relief Act of 1997. This retirement account was first referred to as an “IRA Plus”.

    A Roth IRA is an individual retirement account, which is funded with after-tax dollars and permits tax-free withdrawals.

    As per the 2020 Internal Revenue Agency (IRS) rules for contribution limits to a Roth IRA, “total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed your taxable compensation for the year, if your compensation was less than this dollar limit”.

    The IRS regulations state that if you are over 59 ½, and have owned your Roth IRA for at least five years, funds can be withdrawn without taxation.

    Conversely, for individuals who are under 59 ½, and have not owned the Roth IRA for at least five years, funds will be taxed and subject to a 10% early-withdrawal penalty tax.

    However, the IRS does recognize exceptions to this penalty, which includes extenuating circumstances like the birth of a child, or buying a home for the first time.

    You can contribute to a Roth IRA up until the tax-filing deadline for the next year.

    Anyone can open a Roth IRA, as long as the individual has earned income.

    The IRS has not imposed any age restrictions on opening a Roth IRA.

    Basically, a Roth IRA basis is the total contributions that have been made to the retirement account. The Roth IRA basis can be determined by adding all contributions made to the Roth, then subtracting any previous withdrawals from the account.

    It is crucial to understand that if you do choose to rollover a 401k to a Roth IRA, the funds that you rollover will be taxed. It is also important to note that some 401k plans do not permit rollovers.

    The first step is to select a reputable IRA custodian who will ask for identifying questions such as date of birth and Social Security Number to open your new Roth IRA account. Then, request that your 401k administrator put the funds into the Roth IRA. Next, you are now able to choose which investments you want in the Roth IRA.

    The major downside to a Roth IRA is that you cannot contribute to one if you make too much money, based on filing status and modified adjusted gross income (MAGI) as outlined by the IRS.

    Single individuals with an income of $139,000 or more cannot contribute to a direct Roth IRA. Married individuals filing separately from a spouse with a MAGI of $10,000 or more, are likewise ineligible for this type of retirement account. Couples filing jointly with a MAGI of $206,000 or more, are not permitted to contribute to a Roth IRA.

    Modified AGI stands for “modified adjusted gross income” is used by the IRS to determine contribution eligibility to a Roth IRA, and the dollar amount that contribution will be. Essentially, if your modified AGI exceeds the limit outlined by the IRS, then you are ineligible for contributions to this type of retirement account.

    For 2020, the IRS increased the modified AGI limit for a Roth IRA. The phase-out range for singles or heads of households is $139,000 or more. Married couples who file together, the phase-out range is $206,000. Lastly, the income phase-out range is $10,000 or more, for individuals who are married but separately filing from their spouses.

    There is no limit to the number of Roth IRAs that you can have. However, as per the 2020 IRS rules for contribution limits to a Roth IRA, “total contributions cannot exceed $6,000 ($7,000 for individuals 50 years old or older), or cannot exceed your taxable compensation for the year, if your compensation was less than this dollar limit”.

    The IRS has established strict contribution limits for a Roth IRA, based on your modified AGI.

    For 2020, the phase-out range for singles or heads of households is between $124,000 to $139,000. Married couples who file together, the phase-out range is $196,000 to $206,000. Lastly, the income phase-out range is $10,000 or less, for individuals who are married but separately filing from their spouses.

    Excess Roth IRA contributions are when you exceeded the total contributions limit outlined by the IRS, or your annual modified AGI exceeded the limit to qualify. As per IRS rules, a 6% “excise tax” is levied on excess contributions, and a specific formula has been provided to calculate those earnings.

    Although similar in many respects, there are some differences between a traditional IRA and a Roth IRA. Contributions to a traditional IRA are not taxed and have tax-deferred growth. Conversely, contributions to a Roth IRA are made with after-tax dollars and distributions are not subject to taxation.

    There are numerous investment options offered by a Roth IRA. However, it is important to understand that you can be limited by both IRS regulations and your respective IRA custodian. Below are the types of investments available to you with a Roth IRA:

    Roth IRAs have plenty of investment options but can be limited by the IRA custodian and IRS rules. These are the types of investments that a standard IRA owner should be able to invest in:

  • Mutual funds
  • Exchange-Traded Funds (ETFs)
  • stocks
  • bonds
  • Options
  • Certificates of Deposit (CDs)
  • Money Market Funds
  • It is crucial to note that as per IRS rules, a Roth IRA cannot be used to invest in physical gold bullion (or any other approved precious metal). The easiest method to invest in gold with a Roth IRA is to buy a mutual fund that includes mining company stocks, or invest outright in the stocks of gold mining companies. This investment strategy is known as purchasing “paper gold.” Mining ETFs and gold ETFs are also available, which provide indirect exposure to the precious metal.

    Investing in precious metals such as gold is an excellent hedge to protect your investment portfolio against economic uncertainties and inflation. A diversification strategy that includes gold (or other precious metals) not only protects your portfolio against market turmoil, but gold also provides significant growth potential. A simple method for diversification is to open a self-directed IRA.

    The Internal Revenue Agency (IRS) has stringent regulations on what types of gold and silver are permitted in an IRA. Essentially, the criteria include the purity levels of the gold or silver, and where it was minted. It is crucial to understand that only specific bullion coins and bars which meet IRA-approved purity levels are permitted in this type of retirement vehicle. Some examples of bullion coins that are approved by the IRS for investing in an IRA include American Eagles, Canadian Maple Leafs, and Austrian Philharmonic.

    It is imperative to understand that the IRS does NOT permit things like collectible coins or numismatics as an IRA account. Any reputable IRA company will only recommend IRA-approved gold and silver bullion coins and bars. Be wary of any Gold IRA company that attempts to push collectible coins or numismatics as an investment option for an IRA – their intentions will be dubious.

    A Gold IRA company is a firm that acts as a custodian for the entirety of the process for setting up Gold IRAs (in addition to other Precious Metals IRAs). The process entails setting up the account, an IRA rollover or custodian-to-custodian transfer, purchasing IRA-approved precious metals, and storing precious metals in an accredited IRS-approved depository. Usually, Gold IRA companies have established relationships with traditional IRA custodians, IRS-approved accredited depositories, and precious metal dealers, which makes the process seamless for clients.

    It is crucial to understand that under federal law if you open a self-directed IRA (including a Precious Metals IRA), you must have a custodian.

    This is solely dependent on your personal preferences. What Gold IRA company you choose is contingent on what components are most important to you, whether it is storage options, ratings, or client services, amongst other factors. Once you have decided on your personal preferences, select numerous companies, then contact them to receive more information pertaining to both the respective firm and products offered.

    Sometimes any movement of money from one retirement plan to another is often referred to as a “rollover”. However, the IRS has specific definitions for a rollover and a transfer. As per the IRS definition, a rollover occurs when the funds being moved are paid to you directly, and you then deposit the money into the other retirement vehicle.

    The IRS has strict regulations and rules pertaining to an IRA Rollover. The guidelines outlined by the IRS for an IRA rollover include having 60 days to deposit the money you have received, in the custodian of your choice. If you are under 59 ½, failing to do so within the 60-day timeframe from initially receiving the funds, will result in a 10% early-withdrawal penalty tax being levied on said funds.

    If you receive distributions from a retirement plan and you rollover into another retirement plan, as per the IRS rules there will be no taxation on those funds. In addition, funds can only be rolled over once in a 365-day period from a specific IRA.

    In a trustee-to-trustee transfer (as the IRS has deemed it) you request that the original IRA custodian transfers the funds to the new IRA custodian. With a trustee-to-trustee transfer, you never touch the funds and the money transferred is not subject to taxation.