If certain conditions are met, a Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals to be made tax-free without incurring additional tax liability. According to Investopedia, it was established in 1997 and named after William Roth, a former Senator from Delaware.
Retirement With IRA
Traditional IRAs and Roth IRAs are very similar, but the main difference is that Roth IRAs are taxed differently. Roth IRA contributions are not tax-deductible because they are made with post-tax money. The money is tax-free once you begin withdrawing it. When you contribute to a traditional IRA with pre-tax dollars, you typically receive a tax deduction and pay income tax when you withdraw the money from the account at retirement.
Saving for retirement with an IRA is very common; in fact, more than one-third of all households in the United States currently have an IRA. On the other hand, the IRS updates the criteria for IRA eligibility on an annual basis to account for inflation, as per AARP. Changes like these will significantly impact who can contribute to a Roth IRA and who can deduct their contributions to a traditional IRA from their taxable income starting in 2022.
The New Bill
According to CNBC, retirement accounts that allow large bequests to the wealthy will no longer be available to the majority of Americans starting next year. On Thursday, it was announced that the Senate had passed legislation to do away with the “stretch IRA,” a widely used financial planning strategy.
No one will be able to take advantage of the current tax law’s conversion provisions after the year is over, not just those making more than $400,000 a year. The legislation stated that all employee after-tax contributions to qualified plans and all after-tax IRA contributions, regardless of income level, will be prohibited from being converted to Roth beginning with distributions, transfers, and contributions made after December 31, 2021, as per MarketWatch.
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