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Roth IRA - The ultimate tax advantaged investing account for Americans

The Roth IRA is a special registered retirement account that can grow tax-free and have tax-free withdrawals.

There are a few minor restrictions, but all in all it is one of the best retirement accounts:

  • The account has to be at least 5 years old
  • The IRS determines the maximum amount that someone can contribute per year (for 2022 it is $6k, if older than 50 can contribute $7k)
  • The deadline for contribution is typically April 15, when taxes are due (for example before April 15, 2022 you can still contribute for 2021)
  • Withdrawals are tax-free after age 59 and 1/2 and having the account for more than 5 years (there isn't a penalty on withdrawing contributions early, but gains are taxed at 10%)

Even though there is an income limit for contributions, there is currently a work around available for everybody to take advantage:

Roth IRA Contribution steps for any income 

 One known caveat to be cautious of: 

When you do the Conversion from a Tradition to Roth if you income is above the limit to contribute directly, you have to be careful if you have an other IRA accounts (whether that be older Traditional IRA or Rollover IRA - from a previous employer).  If you have these accounts, then you can't straight forward do the conversion without tax consequences.  Because Traditional IRA or Rollover IRA you benefited from a tax deduction when contributing, these have to be treated as income when converting to Roth (and you can't pick the order of accounts for conversion as it is suppose to be done pro rata).  However, you can roll these back into a 401k plan or other non IRA plan to do the conversion as planned. 

Final thoughts:

  • looking into Roth IRA is definitely worth doing for the tax advantages it currently offers
  • I'm not your financial advisor, so please seek your own accountant, advisor, lawyer as you may have special circumstances and the laws may have changed since creating this article (and I may totally be misinterpreting the information I found)
  • currently, this type of account can have public and private investments, but you just have to pick the right custodian for your comfort.  The major brokerages and investment firms like Vanguard, Fidelity, Schwab, ETrade, TD Ameritrade, all offer this type of account as well as Trust Companies like Millennium Trust, Strata Trust, Kingdom Trust, etc all offer these types of accounts for private investments
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