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Retirement: For Individuals: Roth IRA

Within all IRAs, you will find some fundamental similarities. For example, each type of IRA allows you to choose from a variety of investments such as mutual funds, stocks, bonds, annuities, and certificates of deposit (CDs). All IRAs may also include tax advantages that you can't get with other savings options. However, different types of IRAs include different features as well.

The following are answers to some frequently asked questions about Roth IRAs:

What is a Roth IRA?

A Roth IRA allows for federally tax-free withdrawals with no mandatory distribution during the account owner's life. Although contributions to a Roth IRA aren't deductible, you won't pay federal income taxes on the gains as long as you've left the earnings in the Roth for at least five years and wait until age 59½ to take withdrawals. Contributions are accessible at any time without the IRS 10% premature withdrawal penalty and are not subject to taxes.

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What advantages does a Roth IRA offer?

With a Roth IRA, you can:

  • Enjoy the potential for tax-deferred growth and the possibility of distributions in retirement that are free of federal taxes.
  • Continue to contribute to your Roth IRA after retirement if the IRA owner has earned income (beyond age 70½).
  • Choose from a wide range of investments.
  • Potentially pass your Roth assets to your heirs free of federal income taxes.

Did you know?

You can send all or a portion of your tax refund directly into your traditional or Roth IRA. Talk to your tax professional about filling out Form 8888 to take advantage of this investment opportunity. (This constitutes an IRA contribution for the year the plan receives the contribution.)

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Can you convert a traditional IRA into a Roth IRA?

A traditional IRA can be converted into a Roth IRA, and there may be some advantages for doing so. You may anticipate that you will be in the same or a higher tax bracket by the time you withdraw the money. If so, it would make sense to pay the taxes now and convert the assets to a Roth IRA to take advantage of the potential for federally tax-free growth and future distributions.

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What difference can a Roth conversion make?

Example: Joan has a $30,000 traditional IRA. She decides to covert her traditional IRA to a Roth. She must then pay her tax liability (assuming a 25% tax bracket), which is $7,500.

The after-tax $30,000 that is now in a Roth IRA grows for 30 years at a hypothetical 6% rate of return. This means that Joan will have $128,756 of federally tax-free qualified distributions for retirement if she leaves the money in the account.

Assumes a hypothetical rate of return of 6% that is for illustration purposes and does not reflect the past or is not designed to project nor depict the performance of any Principal Fund. The rate of return in this hypothetical is constant over time when actual account values may be subject to market rises that cannot be predicted.

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While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Sales Support at 1.800.787.1621.

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