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Why You Should Have a Roth IRA During Turbulent Times

Contribution deadline for 2019 is extended to July 15 due to the coronavirus

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En español | When the IRS extended the 2019 tax-filing deadline to July 15, 2020, it also extended the deadline for contributing to an IRA. If you haven't made your 2019 contribution yet and are worried that you may need the money for emergencies, a Roth IRA can provide a double benefit: Your money grows tax-free for retirement, but you can withdraw your contributions without penalties or taxes anytime.

"Funding your Roth is a use-it-or-lose-it opportunity each year,” says Mari Adam, a certified financial planner in Boca Raton, Florida. “A Roth IRA lets you move money into a special forever-tax-free account. Once you put money in that account, it will never be taxed again, for you or your heirs. That's an amazing opportunity rarely available in the investment world.” You can withdraw your earnings tax-free after age 59 1/2, as long as you've had a Roth IRA for at least five years.

Contributing to this type of IRA can be particularly valuable during volatile times. “The financial disruption being felt by so many is a harsh reminder of the value of having an emergency fund holding three to six months of essential living expenses,” observes Didi Dorsett, a certified financial planner in Occoquan, Virginia. “A Roth IRA, while intended to build retirement assets, may also provide much-needed relief during financially stressful periods, since you can withdraw your contributions (but not earnings) at any time without penalty or taxes.”

Who can contribute

You have until July 15 to contribute up to $6,000 to a traditional or Roth IRA for 2019 (or $7,000 if you were 50 or older). To qualify to make Roth IRA contributions, your 2019 modified adjusted gross income must have been less than $203,000 if you are married and filing jointly or $137,000 if you are single. The amount you can contribute to a Roth starts to phase out if your income is more than $193,000 as a joint filer or $122,000 as a single filer.

Some people don't realize they're eligible for a Roth IRA. You generally need to earn income from a job to make IRA contributions, but if you work and your spouse does not, you can contribute to a spousal IRA on his or her behalf (Roth eligibility is based on your joint income). If you are retired but earn part-time or freelance income, you can contribute up to the amount you earned from working for the year (up to the $6,000 maximum or $7,000 if 50 or older). There's no minimum or maximum age limit for contributions.

Keep up with the latest tax related tips, updates and resources.

Great for the kids, too

"One of the smartest steps you can take as a parent is to encourage your child to set up a Roth IRA account, with you as the custodian, and start contributing each year.”

-Mari Adam, Certified Financial Planner

If you have children or grandkids of any age who worked in 2019 (even just a summer job), they can contribute up to the amount they earned to a Roth IRA (no more than $6,000). You can give them money to contribute and may need to sign extra papers to set up the account for a minor. These contributions can give kids a huge head start for their future – cash that grows tax-free for decades — while providing a stash of money they can access without penalties or taxes for a house down payment or emergency expenses.

"One of the smartest steps you can take as a parent is to encourage your child to set up a Roth IRA account, with you as the custodian, and start contributing each year,” Adam says.

Michelle Morris, a certified financial planner and enrolled agent in Quincy, Massachusetts, says that young adults often miss the opportunity to contribute to a Roth IRA when they're starting out in their careers. She often recommends that parents or grandparents earmark some of their gifts for Roth IRA contributions.

If your income is below a certain level, contributing to an IRA, 401(k) or other retirement savings plan provides an extra break: If your adjusted gross income in 2019 was under $64,000 if married and filing jointly, $48,000 for the head of household or $32,000 if single, you may be eligible for the retirement saver's tax credit. This can be worth up to $1,000 per person ($2,000 for married people filing jointly) at the lowest income levels. See IRS Form 8880 to calculate and claim the credit. To qualify, you must be 18 or older and not be a dependent on someone else's tax return.

People who earned too much to qualify for the saver's credit when they were working often overlook this break when their income drops after they retire, if they're still earning income from part-time or freelance work and can contribute to an IRA.