Maximizing your Opportunities with a Roth IRA
A Roth Individual Retirement Account (IRA) can be one of the best retirement and financial planning opportunities out there. A Roth IRA is funded using after-tax dollars, and then grows tax-deferred for as long as it remains in the account. Distributions are then tax-free when the money is eventually taken out.
Roth IRA Contributions
In order to make a Roth IRA contribution, you must have earned income. In 2019, the maximum amount one can contribute is $6,000, and if you are age 50 or older, you can add another $1,000 as a catch up contribution. Unlike a traditional IRA, people who are still working after age 70 ½ can still contribute to a Roth IRA. In 2019, the ability to make direct contributions begins to phase out when your Adjusted Gross Income reaches $122,000 for single filers and $193,000 for joint filers.
If your income is over these levels, a “back door” contribution may be an option. This involves making a non-deductible contribution to a traditional IRA and then converting it to a Roth. There are other factors to consider before utilizing this strategy, so a discussion with a financial service professional is necessary.
Conversions to a Roth IRA
A Roth conversion involves moving assets in your current pre-tax retirement plan or traditional IRA to a Roth IRA. Assets that are converted are treated as taxable income in the year that you convert it. Conversions do not require earned income or have income limits, nor is there a limit on how much you can convert.
Three reasons to consider a Roth conversion:
1. No Required Minimum Distributions (RMDs) — The IRS does not require distributions from your Roth IRA at age 70½ because you have already paid taxes on the money.
2. You Believe Your Tax Bracket Will Be Higher In Retirement — In this scenario, paying taxes at your current tax rate is preferable to paying a higher rate after you’ve stopped working. This may not sound likely, but it isn’t particularly difficult to imagine, especially if you haven’t yet hit your peak earning years or you’ve accumulated significant savings in your retirement accounts. Also, current tax rates are historically low. The Tax Cuts and Jobs Act of 2018’s tax rate cuts are scheduled to last through 2025, but could end sooner. Future tax rates could easily be higher.
3. You Want To Maximize Your Estate For Your Heirs — If you don’t need to tap your IRA funds during your lifetime, converting to a Roth IRA, since there are no RMDs, could allow you to leave more for your heirs. Although Non-spouse beneficiaries will have RMDs, they can let the majority of the account continue to grow for their lifetime and won’t pay taxes on withdrawals either.
With all of the considerations regarding a Roth IRA, it can be helpful to consult with a financial planning professional to determine if these strategies could improve your situation. In addition, a professional can help you navigate the IRS rules that need to be followed to make sure these strategies are successful. Contact your registered representative or your local credit union for a referral.
