Roth IRA’s

Roth IRA’s

Stated simply, if you have cash in banks or assets in taxable brokerage or mutual fund accounts, but you do not have a Roth IRA, you are missing a tremendous opportunity. This article can end on the power of that one statement, but the advantages of the Roth IRA warrant further explanation.

First, if we consider how the Roth works, it is the opposite of a typical IRA or 401k. For example, when you place money in a traditional IRA you receive a tax deduction, but you pay taxes on anything withdrawn. However, with a Roth IRA, when you deposit money in the account, you do not receive a deduction, yet withdrawn monies are 100% tax free if you are over 59 1/2 years of age and have held your first Roth for more than 5 years. Another significant difference is that the Traditional IRA requires withdrawals at age 70.5, but there are no minimum withdrawals for the Roth owner or their spouse who may inherit the Roth.

One age-determined myth hindering investment is, “I am too young and do not want to lock my money up until age 60”. The truth of the Roth is that you can get the contributions back at any time, at any age free of taxes and free of penalty. For example, assume you are 30 and you put $5000 in a Roth IRA for four years and at age 35 you have an emergency and need to withdraw funds. You can withdraw $20,000 (4x$5000) of your contributions without penalty, income tax free (the withdraw is of course subject to investment returns on your Roth account and an investment loss may hinder the return of contributions, but a safe FDIC investment can be used as the investment in a Roth).

Another age-related myth is, “I am too old and there is no benefit now in contributing to a Roth”. The truth is any dollar that can go into a Roth and grow tax free is of no detriment. In addition, since there are no withdrawal requirements at age 70.5 for you or a spouse, the monies can sit and grow tax free for years. That sounds like quite a benefit even if only on $5000.

Even if you feel the only cash you have to invest is for emergencies, because the Roth is primarily liquid you could invest in the same bank account and make the funds tax free. [There will be a day when banks pay interest again.] The key is to remember that you can only contribute at the rate of $5500/year plus $1000 catch up, if you are over the age of fifty. Therefore, any year you do not contribute that amount means your opportunity to accumulate Roth monies is lost forever.

At the other end of the financial spectrum are those who respond saying, “the only monies I have are in growth investments, and I would have to sell and pay taxes on the proceeds”. However, since the contribution rate is only $5500 ($6500 if over 50), the taxation on the amount you sell is absorbed by the opportunity to grow contributions tax free from that day forward.

Finally, the main reason people do not do Roth’s is two-fold. Part one affects those whose income is high and breach the $181,00 income limitation for Roth contributions in 2014. With the use of a complex tax strategy even those with high income will find that a Roth IRA is readily accomplished with the help of a competent financial tax advisor. Part two, and the real reason, is that often financial advisors do not want to take monies out of larger accounts and place smaller amounts in Roth accounts requiring maintenance. Yet the benefits of the Roth IRA are noteworthy. So, if you do not have a Roth, but you have had a financial advisor for years, then you should be curious as to “Why”?

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