Question

What is the tax benefit of a Roth IRA for someone that is young with a low salary, that is expected to make a significantly higher salary in the future? Assume the US tax brackets stay the same.

Answer 1

Roth IRA is an type of IRA ( Individual Retirement Account ).

• There is one major difference between Traditional IRA and Roth IRA which is in traditional IRA, an individual can direct their pre tax income towards IRA and hence reduce tax now but they have to pay tax while withdrawing the amount after retirement.
• In Roth IRA you can direct only your after tax income towards IRA which means you are already paying tax on the funds you direct towards IRA hence you need not pay tax while withdrawing tax after rettirement.

As mentioned in the question if the person is young and expected to get high salary in future investing in ROTH IRA will make their retirement withdrawals tax free. As He/she is paying is already after tax the retirement fund will grow as tax free.

This is one of the major benefit one can enjoy under Roth IRA.

• Another major benefit of Roth IRA is there is no Required Minimum Distribution (RMD) as in case of traditional IRA. Incase of Traditional IRA an individual must start withdrawing their retirement funds once they cross 70 _1/2 years of age. They must withdraw their current RMD every subsequent years in traditional IRA.
• Incase of Roth IRA an individual not only is not required to withdraw RMD but also can continue making contributions towards Roth IRA even after 70_1/2 years of age. they can make contribution indefinitely as long as they have earned income.

One of the limitations of ROTH IRA is that if the individual earns too much money he/she cannot make contributions to ROTH IRA. There is a maximum limit of annual income and people who earn within this income only can contribute to ROTH IRA.

For 2019 - $137,000 for singles and $203,000 for Couples.

For 2020 - $139,000 for singles and $209,000 for couples.

As mentioned in the question, he/she can make contribution to IRA now with low salary but if their salary increased significantly in future and exceeds the annual income limit then he/she cannot contribute towards Roth IRA.