The ins and outs of a Roth IRA (Individual Retirement Account)

“I know I should be investing, but I’m intimidated and don’t know where to start. The terminology is confusing – so many names and acronyms, and I’m not sure what any of them mean. I’ve heard of an IRA, or a Roth IRA, but I don’t know what the difference is. Help!”

Thinking about investing is definitely a big topic, and one that you’ll want expert advice on as you make decisions. Let’s turn to NNB Wealth Management’s Jared Roush for some helpful information:

Great questions. First, let’s talk about what a Roth IRA is.

A Roth IRA is an individual retirement account (IRA) that lets you make qualified withdrawals on a tax-free basis, if certain conditions are met.

Roth IRAs are similar to traditional IRAs, but their biggest difference is in how they’re taxed. Roth IRAs are special retirement accounts where you pay taxes on money going into your account, and your contributions are not tax-deductible. But once you start withdrawing funds, the money is tax-free.

Traditional IRA deposits are usually made with pre-tax dollars, and you often get a tax deduction on the money that you contribute. You’ll then pay income tax when you withdraw the money from the account after you retire.

I like Roth IRAs for several reasons.

First, if an emergency comes up and you don’t have a rainy-day fund, you can make tax-free withdrawals from your Roth IRA contributions. It is the “earnings” within the account that you must avoid withdrawing to avoid tax penalties.

For example, let’s say that throughout 2020 you’ve made deposits into a Roth IRA that total $1,000. But in December, when an emergency comes up, you need cash on hand. Because you’ve earned some interest over the course of the year, your Roth IRA has a balance of $1,050, but you can take the $1,000 of contributions back out of the Roth IRA, tax-free!

Money that you’ve deposited into a Roth IRA can be withdrawn tax-free, since you were taxed on it when you deposited. But – you should leave the interest earnings alone.

(I do want to mention – if an emergency does come up, please consider withdrawing from your Roth IRA as a last option.)

Now you may be saying, that’s great that the money I put into my Roth IRA comes out tax-free, Jared, but what about the interest I’m earning? How can I get that money?

All of your earnings will be tax-free once you’ve owned the Roth IRA for 5 years AND you meet one of the following criteria: you’re 59 ½, you have a disability, or you’re a first-time homebuyer.

The clock on the 5-year requirement starts on the day you first contribute to the Roth IRA. So basically, if you’ve contributed to a Roth IRA over many years, watching your investment grow, you can withdraw from your Roth IRA after you turn 59 ½ and never pay any taxes on those earnings. In my opinion, that is free money!

And one additional nice feature of a Roth IRA - you don’t have to worry about reporting your contributions on your annual income tax return.

(However, I recommend that you maintain your own accurate records so that you can keep track of your contribution amounts and the 5-year holding period timeline.)

Finally, Roth IRAs are best when you think your taxes will be higher in retirement than they are right now.

I like the idea of knowing that I can make tax-free withdrawals when I am older and retired, after I’m 59 ½ and beyond the 5-year rule. Who knows what the income tax rates will be in the future? This way, if I withdraw from my Roth IRA, I have peace of mind knowing that the withdrawal, which will consist of my contributions and interest earnings, is all tax-free!

Of course, with any type of investment, there are IRS rules and regulations to follow.

Be sure that you’re not contributing more into the Roth IRA than you’re permitted. For tax year 2021, an individual can contribute up to $6,000, and if you’re 50 or older, you can contribute up to $7,000.00. You must also have “earned income” to contribute into a Roth IRA, which basically means your W-2 wages.

(Some exclusions of “earned income” are unemployment benefits, rental property income, and child support.)

If you don’t have earned income, but your spouse does, they may be able to contribute into the Roth IRA on your behalf, which is called a spousal IRA.

Also, if your employer offers a retirement plan like a 401(k), check with your HR department to see if they also offer a Roth 401(k), and start contributing into it.

Always be sure to check with your tax advisor and do the proper research to make the best decision for your own unique tax situation.

Everyone is different, and depending on your total annual income, you might not qualify for a Roth IRA. Also, the Custodian of your Roth IRA (whether it’s a bank, brokerage, or investment company) may have their own requirements for Roth IRA accounts such as minimum balances, annual costs, or fees.

The bank offers traditional and Roth IRAs through our branches as well as through NNB Wealth Management and Northumberland Investment Services.

When you’re ready, give us a call or make an appointment to visit one of our branches, and we’ll find the right fit for you.

For more information about Roth IRAs, rules, and regulations, check out, or email us at [email protected].

You can also visit NNB Wealth Management to learn more about our team and the services that we offer.

Jared Roush is a Vice President and Trust Officer within The Northumberland National Bank’s Wealth Management & Trust Division. He has been with The Northumberland National Bank for 20 years and has been within Wealth Management for the last 8 years. In 2019, Jared earned his CTFA (Certified Trust and Fiduciary Advisor) certification from the American Bankers Association.