The Roth IRA is a retirement plan that most family child care providers should establish because of its long-term tax benefits.
The Roth IRA works differently than every other IRA plan. Here are its main components:
Eligibility: You are eligible to contribute to an IRA if you are single and make a profit of less than $127,000 ($129,000 for 2014). If you are married and filing jointly, you can contribute to a Roth IRA if your profit and your spouse’s gross income is less than $188,000 (191,000 for 2014). These are income limits for 2011.
(If you are single and are making a profit of more than $127,000, contact me! I want to write an article about how you became so successful.)
Contribution limits: You may contribute up to $5,500 of your profit each year, or up to $6,500 each year if you are age 50 or older. (These are 2013-2014 limits.) You don’t have to contribute the maximum each year. Some investment funds allow you to set up a Roth IRA for less than $3,000.
Deadlines: You can set up a Roth IRA before April 16, 2013 or before October 15, 2014 if you file a tax extension. The sooner in the year you contribute to your Roth IRA, the more interest it will earn.
Tax deductibility and deferral: Contributions to a Roth IRA are not tax-deductible as they are for all other IRAs. But, when you withdraw money after age 59 1/2, you will not have to pay any tax on your contributions or the interest you earned. Because of this, over the long run, a Roth IRA will earn money money for you, after taxes, than a traditional IRA.
I will discuss other IRA options in future articles: SIMPLE IRA, SEP IRA, and the self-employed 401(k) plan.
Image credit: cashflowplanningforlife.com
I’ve written much more about IRAs in my book: Family Child Care Money Management and Retirement Guide.