We have made no secret of our love of Roth IRA accounts. To name just a few perks, the money grows tax-free. The withdrawals are also tax free. Roth IRAs do not have required minimum distributions (RMDs). They may provide more control and flexibility over your retirement funds. And, even those who already participate in an employer-sponsored retirement plan can make contributions to a Roth IRA.
With a Roth IRA you enjoy the benefits of tax-free growth on your contributions. Owners of a Roth IRA are not required to take “RMDs”, allowing you to sit back and watch the funds grow tax free for as long as you want. In contrast, owners of a Traditional IRAs require RMDs to be taken by age 70 ½. In the event you need to withdraw funds from the account, you can do so without tax consequences after the age of 59 ½, as long as you have had at least one open Roth IRA account for five years. And remember, for 2018, the contribution limits for a Roth IRA are $6,500 (for those who are age 50 and older). A non-working spouse can also open a Roth IRA based on the earnings of the working spouse.
A Roth 401(k) makes for a great go-to option as there are no income limitations and they still offer tax free growth and withdrawals. The Roth 401(k) also allows larger contributions compared to the Roth IRA, as you can stash up to $24,500 (for those age 50 and older) for 2018. The Roth 401(k) requires you to take an RMD upon the age 70 ½ (unless you are still employed by the plan’s sponsor). However, to avoid taking your RMD, you can consider rolling your money from your Roth 401(k) into a Roth IRA and then the money grows tax-free throughout your life.
For those with large IRA balances, consider partial Roth conversions over time to avoid any serious tax implications and to build your Roth IRA account. Partial Roth conversions ensure that you avoid bumping yourself up into the next income tax bracket and taking a tax hit. Although you can convert all your IRA’s at one time, it is important to note that the new tax laws regarding conversions have changed. If you complete a conversion from a Traditional IRA to a Roth IRA, it cannot be reversed. Proceed with caution and consult with us before you consider a conversion. Having said that, the Roth IRA is still a great planning tool!
Building your Roth nest egg will provide many tax benefits today (and in the future) too. If you are in a lower income tax bracket, you should consider a Roth IRA today, especially if you foresee your tax bracket increasing over time. For those in higher income tax brackets, Roth IRAs and the Roth 401(k) are a great diversifying tool. Contact us today to discuss the benefits of a Roth IRA and Roth 401(k).
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10% IRS tax penalty.
Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place after age 59 1/2 or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.