Arguably, a Roth IRA is the best investment vehicle on the planet. As we've recently examined, there's a laundry list of reasons in favor of opening and contributing to a Roth IRA, and a substantially smaller list of reasons another investment vehicle would probably be a better choice.
If you'd like to know more about IRAs in general, check out our IRA Center, where you can learn about these investment vehicles and pick up tips on how to get started. But for now, let's have a look at some of the fascinating figures behind the Roth IRA to give you some sense of why it's such a popular investment tool, and how quickly its allure is growing.
1. $5,500 max contribution
The important number that most investors are going to want to know is what they can contribute each year. Per the Internal Revenue Service, those 49 and under are allowed to contribute up to $5,500 annually to a Roth IRA. Assuming you begin contributing early in life and max out your contribution, there's no reason your nominal contribution (before investment gains) can't top $200,000, or more by the time you retire.
2. Unless you're over 50 -- then add $1,000
The added benefit of the Roth IRA for seniors and pre-retirees ages 50 and up is the bonus of a catch-up contribution. This catch-up contribution allows those 50 and up to contribute $1,000 extra on top of the $5,500 contribution limit in 2016, for a grand total of $6,500 annually. Roth IRA contribution limits are often adjusted in-step with the rate of inflation every few years, so this $6,500 contribution limit is probably going to head higher in the years to come.
3. 0% tax rate on eligible withdrawals
The primary allure of the Roth IRA is its tax benefits. Unlike its sister plan, the Traditional IRA, or an employer-sponsored 401(k), a Roth IRA is funded with after-tax dollars, providing no upfront tax benefit. However, all investment gains recognized within a Roth are free and clear of taxation for the life of the account as long as you make no ineligible withdrawals.
Since withdrawals won't count toward your income during retirement, a Roth IRA could help you remain in a lower tax bracket when retired, and may even be responsible for helping you to avoid Medicare premium surcharges and/or being taxed on your Social Security benefits.
4. 10% penalty on ineligible withdrawals
What's an eligible withdrawal? With a Roth IRA we're talking about using money within the account for any purpose after age 59 1/2. Before that age, there's a narrow list of exemptions, such as a first-time home purchase, to cover medical premiums after the loss of a job, or to pay unreimbursed medical expenses exceeding 7.5% of your adjusted gross income. As a Roth IRA account holder, you'll also have the ability to withdraw your contributions (not to be confused with investment gains) at any time, for any purpose.
However, if you were to make a withdrawal of investment income or gains generated from your contributions before age 59 1/2 for a non-eligible purpose, you'll be facing ordinary income tax as well as a 10% penalty. Money that's being invested in a Roth should be expected to stay there for no less than five years, and ideally longer.
5. Income limits for individuals ($132,000) and couples ($194,000)
Not everyone has the ability to contribute to a Roth IRA, but there's a way around it.
According to the IRS, individuals earning between $117,000 and $131,999 in modified adjusted gross income (MAGI), and joint filers earning between $184,000 and $193,999 in MAGI will see their contribution limit reduced by phase-out regulations. Once an individual hits $132,000 or more in MAGI, or a couple hits $194,000 or more in MAGI, they're disallowed from contributing to a Roth IRA.
However, there's nothing that stops these higher-income individuals and couples from contributing to a Traditional IRA, which has the same annual contribution limits and catch-up clause, and then subsequently rolling over their Traditional IRA to a Roth IRA and paying tax in the process. This backdoor approach has been fairly popular among affluent individuals and couples.
6. 28.5% of individuals have a Roth IRA
Based on data in 2013 from the Employee Benefit Research Institute (EBRI), 28.5% of all individuals have a Roth IRA account. As a reminder, the Roth IRA was only established by the Taxpayer Relief Act of 1997, so consumers have had just 18 years to make contributions. In a way, it's still a fairly new investment option for a lot of folks, who have been able to contribute to a Traditional IRA since the mid-1970s, or an employer-sponsored 401(k), if one is offered, for well over three decades.
7. 51.6% growth in Roth IRA account balances between 2010 and 2013
Though fewer than a third of all individual IRA accounts were Roth accounts as of 2013, the growth in Roth IRA accounts from 2010 to 2013 is phenomenal. Based on data from EBRI, Roth IRA balances grew by 51.6% over this three-year time span, compared with just 28.3% growth in Traditional IRA balances between 2010 and 2013. EBRI cited the growth in newer contributors as the reason why Roth IRA balances are expanding so quickly.
Furthermore, EBRI's report on IRAs also pegged 2013's aggregate Roth IRA contributions at $6.08 billion, compared with $4.61 billion for traditional accounts.
8. Average balance of $37,010
The relative "newness" of the Roth IRA is on full display in the EBRI's data looking at the average Roth IRA account balance compared with all IRA types. As noted in its data, while the average IRA individual balance was $119,804 in 2013 (this includes all IRA accounts added together for the same person), the average Roth IRA balance was just $37,010. In fact, just 6.4% of all Roth accounts in 2013 had $100,000 or more.
9. 39.9% maxed out their contribution
Lastly, you might find it intriguing that just 39.9% of individual accountholders maxed out their Roth IRA contribution in 2013 compared to 46.3% of Traditional IRA accountholders. Once again, Traditional IRAs have been around for 23 years longer than Roth IRAs, and older individuals are more likely to max out their contributions because of better pay than younger individuals, leading to the max contribution difference. In particular, Generation X was more likely to max out a Traditional IRA than a Roth IRA.
Despite this difference, and the fact that the average contribution to a Traditional IRA was handily higher than the Roth IRA in 2013 ($4,338 vs. $4,009), the sheer volume of new participants opening and contributing to a Roth led to the aforementioned $1.47 billion aggregate difference in full-year contributions in favor of the Roth IRA.
Long story short, expect the importance of America's greatest retirement tool to grow in the years to come.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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