If you have done any research, talked to a financial advisor, or even chatted with a friend about how to prepare for retirement, its likely you’re familiar with Roth IRA’s. They’re probably the most widely covered tool in the industry toolbox, and the reason is simple. Roth IRA’s give you financial advantages at every stage of your life that you won’t get anywhere else.
A Roth IRA can get you closer to your goals today, which we’ll explore below. But I absolutely love them because they tend to bear fruit for clients years later, when they’re ready to plan for the goals they aren’t even considering today.
First, let’s cover the basics: A Roth IRA is an account you open in your name. Each year the IRS sets limits on how much you can contribute to the account. In 2021, the limit is generally $6,000. If you’re over 50 you can contribute $7000. Any interest earned in the account should stay in the account until you are 59.5 years old- otherwise you may owe income tax and a 10% penalty for early withdrawal. However you can withdraw your original contributions at any time without penalty, for any reason. But here’s why a Roth IRA is money wizardry: As long as you follow the rules outlined above, and your account is at least 5 years old, your money grows tax free, and you can spend it tax free.
Here are a few ways Roth wizardry can help you out at whatever stage you are in your journey.
When you’re young and just starting your money planning
- If you’re tax rate is low, you pay this tax rate instead of later in your career when your tax rate may be higher.
- If you start saving for retirement with a Roth IRA in your 20’s, you will give yourself 40+ years of tax free compounded growth. You’re combining your greatest asset (TIME) with tax free growth.
When you buy a home
- Even though a Roth is a retirement account, you can withdraw up to $10,000 for a first time home purchase.
- You can withdraw contributions at any time for large expenses like repairs, appliances, etc.
When you send your kids to college
- Use Roth money for your child’s qualified education expenses tax free.
- Retirement assets in a Roth IRA are treated much more favorably in the FAFSA student aid application process. This is true for parent and child owned Roth IRA’s.
If you own a business:
- Do your minor children work in the business? Pay them and contribute the money to their Roth IRA’s. This is tax deductible to you, and tax free to them forever.
- Set up a 401(k) that allows you to contribute on a Roth basis. The contribution limits are higher, meaning more money available tax-free at retirement.
When you retire
- Congratulations! You have a tax free pool of money you can access whenever you need. No annual required distribution headaches, and no taxes on the distributions.
- Roth Income doesn’t affect your Modified Adjusted Gross Income: So it won’t increase your Medicare part B premiums if you have high income
When you are ready to plan your estate
- Unlike a Traditional IRA that gives heirs a tax bill each year they spend the money, a Roth IRA is a nice inheritance without the tax hit.
Wishing you had more Roth Wizardry going on with your money? Here are a few steps you can take to make it happen:
- If you don’t have a Roth IRA, open one. Talk to an advisor you trust to work in your best interest.
- Does your employer offer a 401(k)? Find out if you can contribute to the plan on a Roth basis- this is a really good deal if you can do it. If you can’t, ask your employer to consider adding the Roth option.
- If you have traditional IRA money, you can convert it to Roth money, but there are tax considerations. Talk to an advisor who can help you weigh your options before you make a decision.
