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.
–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.