We have a special blog post tonight from the one and only Senor Frog, one of our biggest fans, submitting this question through the website contact form – What are the advantages to setting up a Roth IRA plan? Great question Senor, thanks for writing us! First, a Roth IRA is a retirement account for individuals. The contributions (money you put in each year) grow tax free, and then when you pull the money out it is also tax free! Pretty nice right? Does this sound to good to be true? All these tax advantages, there must be a catch, and there are, a few anyway…
- Income Limits – not everyone can open a Roth IRA, you have to be below a “Modified AGI” (Adjusted Gross Income) amount each year. In 2018, the amount for married couples filing jointly to make full contribution amounts is $189,000, and single/head of household tax filings the max modified AGI is $120,000. If you file married but filing separately, contact your tax specialist for plan details.
- Contributions Limits – with tax advantages who wouldn’t want to put all the money they can into this plan, this includes me, what’s the maximum each year? In 2018, the maximum contribution to a Roth IRA is $5,500, or your total taxable compensation amount for the year, if your compensation was less than $5,500. Bonus for the 50+ crowd, if you are age 50 or older, the maximum contribution amount is $6,500. This additional amount is often referred to as the “catch-up” provision.
- Tax Limits – what tax limits, in the intro of this post there was nothing but tax advantages! With a Roth IRA, there is no income tax deduction on the contribution amounts. This is also the reason when you withdraw the funds it is tax free, because you already paid taxes on the money you put in! Also, unlike a non-qualified brokerage account, if you have a loss in the account there is no tax write-off for the losses incurred.
- Withdrawal Limits – if you satisfy the requirements, qualified distributions are tax free. The basic qualified distribution would be pulling money out of this plan after age 59 1/2. However, if the account has grown and you are under the age of 59 1/2 you are penalized if the withdrawal includes contributions and gains. In this scenario, the gains are taxable and penalized.
Hmmm, not sure this plan sounds so great anymore, read on, it gets better! The advantages of the Roth IRA plan are:
- It’s a savings plan often used alongside a 401(k) or other retirement plan to mix tax strategies in retirement.
- The contributions made into the plan grow tax free. Compounding tax free growth adds up to a lot of money over 10, 15, 20, or even 30+ years.
- If you still have earned income, you can make contributions to this plan beyond age 70 1/2. People are living longer, and working longer, this may be a bigger advantage than people think.
- There are not RMD’s (Required Minimum Distributions) with this plan. Unlike a IRA/401(k), at 70 1/2 nobody (IRS) is demanding you take a certain amount each year. This is very important during market corrections or downturns.
- And finally, tax free withdrawals! Wouldn’t it be nice after paying 30 or 40 years of taxes to receive tax free income.
Summary: It’s not a perfect plan, those don’t exist. But this plan offers tremendous tax savings opportunity. To grow a retirement account over a working period of time, whether its 40 years or 5 years. If you would like to speak with one of our advisors regarding how you can take advantage of a Roth IRA, contact us today.
This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.