There are many benefits of a Roth IRA
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. And if you’re age is 59½ or older, you can withdraw your money when you want to and you won’t owe any federal taxes. YES, TAX FREE WITHDRAWALS!
Other Roth IRA Advantages
There are no required minimum distributions (RMDs) for as long as you live.
No age limit
Contributions to a Roth IRA don’t have to stop when you reach age 70½, the cut-off for a traditional IRA. You can put money in your account for as many years as you want, as long as you have earned income that qualifies.
No employer-plan restrictions
It doesn’t matter if you’re covered by an employer’s retirement plan, such as a 401(k) or 403(b). As long as you don’t exceed the IRS’s income limits, you can still contribute the maximum annual amount to a Roth IRA. Work with a professional for the IRS limits.
No taxes for your beneficiaries
You can pass your Roth IRA on to your beneficiaries, and their withdrawals will be tax-free.
After the December 2019 passage of the 2020 Retirement SECURE Act, it’s a good time for you to consider including a Roth IRA in your retirement planning.
Investments in a Roth IRA have the potential to grow tax-free, which may help you save more over time. Plus, Roth IRAs don’t have required minimum distributions during the lifetime of the original owner, and Roth IRA assets may pass to your heirs tax-free.
Given the end of the stretch-IRA, and the 10-year distribution window for any investment inheritances, this is an important investment you need to take into consideration.
Why is a Roth IRA a good idea?
A Roth IRA tends to be an informed choice in any of these circumstances:
- You want to avoid the RMD, which the IRS mandates at age 72 from a traditional IRA.
- You seek to be able to lower your taxable income in retirement.
- Concerns that your tax rate will be higher when retired than it is while you are working.
- You prefer to see your investment earnings grow tax-free.
Determining if a Roth conversion is right for you
Anyone can convert their eligible IRA assets to a Roth IRA, no matter their income or marital status.
There are three important factors you should take into consideration when exploring a Roth conversion – taxes, time, and costs.
It’s also important to note that if you are required to take a required minimum distribution (RMD) in the year you convert to a Roth IRA, you must do so before converting.
Roth IRA basics
With a Roth IRA, you make contributions with money on which you’ve already paid taxes. You’re able to withdraw your contributions tax-free and penalty-free at any time, for any reason. Any earnings have the potential to be withdrawn tax-free in retirement.
Distributions from a Roth IRA are qualified, and thus tax-free and penalty-free – provided that the 5-year aging requirement has been satisfied and at least one of the following conditions has been met:
- You reach age 59½
- You pass away
- You are disabled
- You make a qualified first-time home purchase
All other distributions are non-qualified. Non-qualified distributions of converted balances are not taxed again (since they were taxed when converted), but they may be subjected to a 10% penalty, unless it’s been at least five years since the beginning of the year of your conversion, you’ve reached age 59½, or one of the other exceptions applies.
Other Roth IRA key factors
A Required Minimum Distributions (RMD) is not required during the lifetime of the original owner of a Roth IRA. Further, RMD amounts are not eligible to be converted to a Roth IRA.
If you qualify, you can do an eligible rollover distribution from an existing 401(k) or 403(b) directly to a Roth IRA. Note that you will owe taxes on the amount of pretax assets you roll over.
Also, if you have assets in a Designated Roth Account (i.e., Roth 401(k)) and would like to roll these to an IRA, the assets must be rolled into a Roth IRA.
RJG Financial & CPA Services focuses on providing education and information to help you understand retirement income and CPA guided tax planning planning in your retirement options.