If you’re thinking about opening a Roth IRA or converting a traditional IRA to a Roth, you aren’t alone. There is a lot to like about these tax-savvy retirement accounts.
One of the biggest attractions of the Roth IRA is that the distributions of your contributions can grow tax- and penalty-free, as long as you don't touch the distribution within five years of your initial deposit and you withdraw after you are 59 1/2 years old. There are income eligibility limits (you can’t make more than $132,000 as a single person or $194,000 as a married couple); however, as most Americans are well beneath these limitations, Roth IRAs end up being a suitable retirement and saving solution.
#1. You think you’re going to be in a higher tax bracket after retirement.
If you feel you are destined for bigger and better things—and thus bigger and better income—as you grow in your career, a Roth IRA can help you frontload your taxes at a lower rate than you may ay when your income is higher. With a Roth IRA, you are essentially locking in your tax rate at the time of contribution because you’ve already paid it; when you withdrawal your dividends in retirement, they won't play into your current taxable income (or push you into a higher tax bracket). This makes Roth IRAs ideal for young, lower-income earners who can get the benefit of tax savings plus several decades of tax-free compounded growth.
#2. You would like to kick start your retirement savings.
Earn a bonus at work? Get a big tax return from Uncle Sam? How about taking that money and buying like a cozy, comfortable retirement. Funding your Roth IRA with a windfall up to the $5500 annual limit ($6500 if you are over 50 and $11,000 for joint Roths) is an excellent way to boost your retirement savings, especially if you already have other investment and savings vehicles. Here’s the caveat: Using one-time influxes of cash as the only way to fund your retirement is not the best strategy. While saving what you can is never a bad thing, your future is much better served if you take the consistent approach of regular contribution each payday..
#3. You want the nest egg to stick around after you’ve flown the coop.
Unlike traditional IRAs, which require participants to begin withdrawals when they turn 70 1/2, a participant in a Roth IRAis never forced to take out money. This can be a useful estate planning tool because it allows the account balance to grow tax-free, and heirs pay no taxes on what they inherit (they must, however, take the distributions over their lifetimes).
#4. You want to keep saving during retirement.
We see this fairly often because our Siouxland neighbors are workhorses that have plenty to give their jobs and their lives beyond age 70 1/2. Unlike traditional IRAs, which won’t allow contributions after that age, you can still fund your Roth as long as you remain employed—even part-time—and stay within the income limits. This can be helpful if you have a younger spouse or want to make sure you have enough funds to enjoy all your years of retirement.
#5. You don’t want to choose between saving for your children’s education and your retirement.
As long as you have the account for at least five years, you can withdraw earnings without penalty to pay for college and higher education costs for yourself or a family member. The drawback: While you avoid the 10% penalty, you will incur income taxes on the amount you withdraw. While it may not be your most productive college savings plan, it can be a safety net that offers more flexibility than a traditional IRA or a 529. It can work to your advantage if you foresee an income drop in the year you pay for the education expense or if you are unsure if your family member will need the funds before you turn 59 1/2.
If all of this sounds good, you may be kicking yourself for not funding a Roth IRA in 2016. Don’t. You always have until Tax Filing Day to fund the previous year. Just don’t wait too long. You don’t want to eat into your 2017 savings while you’re feeding 2016.
Ready to learn more? Our Wealth Management team is here to help.
Back to Articles