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IRAs, or individual retirement accounts, are tax-advantaged tools that help you save for retirement.
With a Roth IRA, savers pay taxes on their contributions upfront and later their withdrawals in retirement are tax-free. With a traditional IRA, the opposite takes place: Savers delay paying taxes on their contributions and then pay income taxes on whatever they take out in retirement.
Regardless of what type of IRA you have, experts generally don't recommend you tap into your retirement earnings earlier than retirement. Not only does withdrawing taxable funds early (before age 59 and a half) also incur a 10% penalty, but you can miss out on years of compounding gains from your investments.
Note that you can withdraw your contributions (but not investment gains) from your Roth IRA at any age, without having to pay penalty fees or taxes. So, limiting your early withdrawals from a Roth IRA to just your contributions means you pay no taxes or penalty fees ever.
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For Roth IRA accounts open five years or longer, you can get out of paying the 10% penalty and income tax if you take early distributions from your Roth IRA investment gains under a handful of exceptions. For Roth IRA accounts that have been open for less than five years and for traditional IRAs, you won't have to pay a penalty when withdrawing gains for the below exceptions, but you may have to pay federal and state income tax. The qualifying exceptions include:
- A first-time home purchase, or to build/rebuild a home: Up to $10,000 as a lifetime limit, and it must be used within 120 days from withdrawal. The withdrawal covers expenses related directly to the home purchase, like the down payment or closing costs. In addition to first-time homebuyers, this includes people who haven't owned a house as a primary residence in at least two years. The money can also be used to help a child, grandchild or parent who meets the homebuyer requirements.
- Childbirth or adoption expenses: Up to $5,000 per parent, made during the one-year period beginning on the date on which the child is born or the date the legal adoption is finalized.
- College expenses: Qualified higher education expenses include required tuition, fees, books, supplies and equipment; expenses for special needs services; room and board if individual is at least a half-time student. The money can be used to pay for your own education, or that of your spouse, children, grandkids or great-grandkids. The withdrawal can't exceed the person's higher education expenses for the year. (Note that using your IRA to pay for education expenses could reduce the amount of need-based financial aid you receive since funds withdrawn from an IRA may count as income, whether taxed or untaxed.)
- Unreimbursed medical bills: This apples to those who don't have health insurance, or have out-of-pocket medical expenses that are not covered by insurance. Medical expenses must be paid within the year you make the withdrawal. Your unreimbursed medical bills must collectively add up to more than 10% of your adjusted gross income (AGI) for 2021 (over 7.5% of your AGI for 2017 through 2020).
- Health insurance premiums when unemployed: If you have received unemployment compensation for 12 consecutive weeks.
- If you become seriously ill or permanently disabled and can no longer work.
This question depends on your current and future income.
Choose a Roth IRA if you expect that you'll be making more money in your later years — and thus in a higher tax bracket later on. It makes more sense to pay taxes today to take advantage of your current low tax rate before it goes up. Plus, your after-tax contributions will have years and years to grow, and none of that growth will be taxed when you make withdrawals in retirement. With a traditional IRA, you get a tax break today but you'll be on the hook for it later on when you want to take out funds.
Many providers, such as banks, credit unions, online brokers and investment companies, offer both traditional and Roth IRAs, but some stand out better for Roth IRA savers because they are attractive to especially young investors.
For example, Fidelity Investments, offers an abundance of educational tools and resources, such as calculators that show users their retirement goal progress and the Fidelity Five Money Musts online game to teach you about managing money in the real world. And, robo-advisor Betterment devotes tons of material to help its users plan for retirement.
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen
Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)
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Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
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Betterment offers retirement and other education materials
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For 2021, you can contribute up to $6,000 to a traditional or Roth IRA if you are under 50, and up to $7,000 if you are 50 or older. While anyone can open and contribute to a traditional IRA, your tax filing status and income level determine whether or not you can contribute to a Roth IRA: if married filing jointly, the annual income threshold is below $208,000; if single, the income threshold is below $140,000; if married filing separately and you lived with your spouse, the income threshold is below $10,000.
Even if you already have a 401(k) retirement plan through your employer, an IRA is a smart way to supplement your retirement savings. Plus, a Roth IRA, specifically, behaves opposite of a 401(k): A 401(k), like a traditional IRA, lets you delay paying income taxes now so your contributions are tax-free, meaning that your withdrawals later in retirement are taxed. With a Roth IRA and a 401(k), you can have a balance of both tax-advantaged savings options at different times in your life.