Women & Wealth: What’s so great about a Roth IRA?
I have been asked in almost all of my client meetings over the last couple of months about a Roth IRA, so I want to take the time to address what is so great about a Roth IRA.
The first and foremost beneficial aspect about a Roth IRA is that it has the potential to grow tax-deferred which means you don’t pay any taxes on dividends or capital gains while your Roth IRA is invested and when someone is in retirement (over the age of 59 ½) then the distributions are tax-free too. Because of the tax benefits you receive in retirement and throughout your ownership of the Roth IRA there is not a tax-deduction when a contribution is made like a contribution for a Traditional IRA. The Roth IRA is beneficial to an investor’s tax situation later in life where the Traditional IRA is more beneficial to an investor’s tax situation now because of the deduction.
A Roth IRA also avoids the required minimum distribution (RMD) at age 70 ½ that the Traditional IRAs require. If you own a Traditional IRA in the year you turn 70 ½ you are required by the IRS to take out a distribution based on your life expectancy (the IRS has a calculation for this distribution). The IRS wants to collect taxes at this point. If you own a Roth IRA, you are never required to make distributions at age 70 ½ because your distributions aren’t taxable.
There are some limitations to contributing to a Roth IRA though. Please see below:
Roth IRA annual contribution limit: $6,000
Catch-up contribution for investors age 50+: $1,000
If you are married filing jointly and your modified adjusted gross income is $193,000 or higher your Roth IRA contributions will be limited beyond the $6,000 maximum. If your tax filing status is single, then your modified adjusted gross income threshold is $122,000.
There is a solution for the $6,000 annual contribution limit and a higher modified gross income; a Roth 401k plan. Many 401k plans have a traditional (pre-tax) option and a Roth (post-tax option). This is a great way to save money in a Roth if you are ineligible to contribute to a Roth IRA. There are no modified adjustment gross income limitations and the total someone can contribute to a 401k plan in 2019 is $19,000 with a $6,000 catch-up contribution for those participants age 50+. Remember when making contributions to a Roth 401k plan your salary deferrals are put into your Roth 401k plan after-tax versus pre-tax like a traditional 401k plan and there will not be any tax-deductions on your Roth 401k plan contributions.
I hope this information was helpful; if you have any questions or any scenarios you would like to run by me please let me know. We help our clients with retirement planning questions daily and are happy to help.
CERTIFIED FINANCIAL PLANNER™
The material is general in nature. This information is not a complete summary or statement of all available data necessary for making an investment decision. Prior to making a decision, please consult with your financial advisor about your individual situation. The accounts discussed here are long-term retirement accounts. Non-qualified distributions prior to age 59 1/2 may be subject to taxes and possible penalties.