By Adam Freeland, CFP and Evelyn Ishmael
Special to The Dagger
Do you have a Roth Individual Retirement Account (IRA)? If not, you may be missing out on one of the new cornerstones of retirement planning.
WHAT IS A ROTH IRA?
When most folks save for retirement, they do it through an employer sponsored retirement plan like a 401k. After they leave the employer or retire they usually roll it over to a traditional IRA. If their employer does not have a retirement plan, they can contribute to a traditional IRA. Here is how 401k and traditional IRAs work:
–You are able to take a tax deduction in the year of the contribution
–Your money grows tax deferred
–You pay taxes when you take the money out at retirement
This format was established back in 1974 and it is the way most baby boomers and Generation Xers have funded their retirement.
The Roth IRA is relatively new variation of the traditional IRA. Established in 1997, the Roth IRA changes the timing of when taxes are paid. In a Roth IRA:
–You make contributions from after tax funds
–Your money grows, tax-deferred
–You pay no taxes when you take the money out at retirement
WHY CONSIDER A ROTH IRA?
The conventional wisdom has been to fund your full retirement savings using the IRA. The assumption is that you should take the tax deduction in your working years while your income is higher and you are in a higher tax bracket.
With mounting government deficits and legislators figuring out ways to rein them in, the assumption that you will be in a lower tax bracket when you retire may not be true if tax rates rise.
Roth IRAs have other advantages. A Roth IRA:
–Lowers Taxable Income in Retirement: Income from other retirement income sources like pensions, Social Security, and IRA’s most likely will be taxed. Therefore, Roth IRA provides an income stream that won’t be taxed.
–Lowers the Threshold for Deductible Medical Expenses: You can deduct medical expenses that are over 7.5 percent of your adjusted gross income. Because you don’t pay taxes on your Roth withdrawals, you keep your adjustable gross income low and have a better chance to deduct medical expenses.
–Allows your Money to Grow: You avoid Required Minimum Distributions at 70 ½ years of age which allows your money to grow for future years or for your heirs.
ACTION STEPS
–Consult a tax advisor or financial planner to see if starting a Roth IRA makes sense for you. Read these tips from King of Kash
–Ask if it would make sense to convert part or all of an existing IRA or 401k.
–Contribute to a non-deductible IRA that can eventually convert of a Roth IRA if your advisor says you make too much money for a Roth.
–Ask your employer if your company offers a Roth option for retirement. If so, consider contributing all or part to the Roth. If not, give serious thought to funding Roth contributions independent from your employer.
–If you are an employer with 401k or other retirement plans, consider adding the Roth feature for your employees.
Roth IRA’s are becoming an essential part of almost all long-term retirement plans. Due to their tax diversification advantages, Roth IRA’s deserve a first or a second look.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Harford Financial Group and Cambridge are not affiliated. Cambridge does not offer tax or legal advice. Please seek counsel for these services from your tax or legal professionals.
Not from Here says
Detail missing: Roth IRAs have income caps.
Tom Myers says
Aren’t there also some ROTH IRAs that allow you to pay taxes on the income that you put into it, and as a result, pay no taxes when you take money out?
Edgewood Resident says
Tom, do you ever read before you post? Your question is already answered in the atticle!
The Roth IRA is relatively new variation of the traditional IRA. Established in 1997, the Roth IRA changes the timing of when taxes are paid. In a Roth IRA:
–You make contributions from after tax funds
–Your money grows, tax-deferred
–You pay no taxes when you take the money out at retirement
Tom Myers says
It didn’t answer my question. Does that apply to all ROTH IRAs? Are there some where you don’t get the tax write-off? I just thought it was an important question to ask? Maybe I could have made it clearer in my qustion?
By the way, it would help if you spell check anything you post on an “atticle” before you go after people there, Goober.
Edgewood Resident says
And there we are with the name calling, right on schedule. Besides, it’s not like you ever made a spelling mistake, right Tom? You have made your fair share too. There are ony 2 types of IRAs, ROTH, and Traditional. Try and keep up Tom, I know it’s hard, but try.
Tom Myers says
Uh huh. And what makes you think I should take financial advice from an anonymous troll? I wasn’t asking you, sir, so keep your mouth shut.
Edgewood Resident says
There you go again with the name calling Tom. Here’s a little tip for everyone out there. If Tom Myers is insulting you and calling you names, what he is actually saying is “You are right, and I have no mature response for what you said, so I am going to give a childish response”. For someone who is in their 30’s, lives at home with mommy, and works for 7-11 for a career, you need all the help you can get. It’s not like you own the 7-11, or like you are a successful comedian.
Look up on youtube “World’s word comedian Tom Myers”.
Terrance says
From Tom’s above post:
“Maybe I could have made it clearer in my qustion?”
Hey Myers, maybe you should start using spell check before recommending it to others.
ps – You have no money. Leave this page immediately.
Tom Myers says
Hey, “Terrance,” I’m telling your mother to cut off your allowance.
Terrance says
That really hurts coming from the guy who still lives with his mother.
Does she iron all your black dress shirts before open mic nights?
Tom Myers says
Mine don’t need to be ironed. I do my own laundry and I do paid shows, Moron. Maybe if you take your head out of your own ass and actually show up to something I am doing, you would know that.
fogdog says
I do not need my IRA for my living expensives. Therefore, I am keeping my money in my IRA for a big medical expense like a nursing home. Since people do not want Obamacare, there will be a cut back in Medicare in the future. We will start paying more medical expensives that are now covered by Medicare.
When taking money out of an IRA to cover a medical expense, it will offset the tax liability.
When cashing in an IRA for a Roth, you are placed into a higher tax bracket. Therefore, if you are able, save your IRA for a tax deductable medical expense.
If I have excellent health and do not need a nursing home, my heirs will inherit my IRA and they can continue to keep it or cash it in for any purpose.
Porter says
@FogDog – You will have to take mandatory IRA distributions at age 70 1/2. You have no choice in the matter.
Exact distribution amounts change from year to year. Calculated by dividing an account’s end of year value by the distribution period determined by the IRS.
frankly speaking says
A tax deferred instrument allows you the defer the tax, not to actually forgive it. a medical expense would not reduce or offset you tax liability and you would have mandatory distributions after 70+ yrs old. The best way to protect you assets is to shelter then in a trust/estate so that when you become incapacitated and have to be in a nursing home, then medicaid can cover the cost….this is just a simple answer to a complex problem and you should not rely on Porter for advice.
Porter says
@FRANKLY SPEAKING You are dispensing advice, I on the other hand made a statement of facts regarding IRA distribution rules.
frankly speaking says
That’s because I am qualifed to speak on these matters, you on the other hand knows how to write.
Porter says
@Frankly Speaking what qualifies you?
frankly speaking says
fogdog is completely clueless and clueless Porter is actually right. Guess even a blind squirrel finds a nut once in a while…
frankly speaking says
I work for a living in a related field…that’s about as much as I can say. However your facts or my “advice” as you called it really said pretty much the same thing, however you turn everything to something that wasn’t intended, I guess that’s how you operate.
Porter says
@Frankly Speaking, just being very clear.
frankly speaking says
crystal!! as Tom Cruise told Jack Nicholson. being that Jack Nicholson is being played by you here, I am jealous. I guess that now you’ll say “you messed with the wrong marine”.
Porter says
@Frankly Speaking – No, I am simply being clear no Nicholson character intonation.
Tom Brandis says
The bottom line here folks is, that no one piece of advice is correct for everyone. Everyone has different financial goals and the only way to sort it out is to sit down with a professional. Also, like they say about doctors, get a second opinion too when it comes to your finances.
Porter says
@TOM BRANDIS – IRS mandatory IRA distribution at age 70 1/2 is not optional. The IRA was tax deferred, not tax-free and the government actuaries have planned to receive taxes at ordinary income rates once people take their required distributions.
You can get as many opinions as you like, but until you successfully lobby congress to change tax law regarding IRA distribution rules it won’t matter.
Tom Brandis says
@Porter. I wasn’t addressing the mandatory distribution at age 70.5.
My point to my post is that not everyone has the same financial goals or expectations. From the posts I’ve seen here, people do not seem to be educated in regards to all the different investment vehicles available to them, hence the need to consult a professional to help steer them in the right direction.
Even with that being said, financial consultants can not by law tell you what to specifaically to invest in, only offer suggestions after educating you on the different products.
Kevin M says
With people living 20, 30 or more years past retirement age the fact that a Roth can keep growing becomes super important. All other retirement plans are required to be gradually liquidated, which could leave you with seriously declining assets by the time you hit your 80s, as many people will.
That really makes a Roth a necessary part of retirement planning. Anyone who can have one should.