Most folks I meet are pretty familiar with traditional IRAs, but not so much with Roths. As a result, in my opinion, the Roth IRA is a vastly underutilized retirement savings and investment vehicle.
In a way, I blame tax professionals for the underutilization of Roth IRAs. Those guys typically focus on minimizing taxes TODAY and may not realize that a Roth IRA can provide tax benefits, access to funds and retirement income benefits that completely blow away traditional IRAs and 401(k)s. The Roth allows you to save for retirement and receive TAX-FREE investment returns, while retaining access to your money if you need it.
Advice for younger savers. Use your 401(k) to get the "match" first... and no more... and then save in a Roth IRA.
Roth IRA basics: A Roth is funded with after-tax contributions (you don't get a tax deduction on the money you put in). Your contributions can be invested in stocks, bonds, mutual funds (ugh!), annuities, etc., and your investment gains are tax-free.
Little-known Roth secrets. While you're not allowed to contribute to a traditional IRA after age 70.5, there is NO age limitation (if you have enough earned income) on contributing to a Roth IRA. Also, Roth IRAs can be set up for minors (kids and grandchildren!) who have some earned income of their own.
While you do need earned income to contribute to a Roth, you can't earn too much money in a particular year. In 2018, for single individuals, your ability to contribute to a Roth phases out once you hit $120,000 and completely maxes out a $135,000. For married, filing jointly couples it's $189,000 to $199,000.
And, by the way, you're allowed to contribute to a Roth IRA in addition to your 401(k) every year (it's not an "either or" situation). Most working Americans earn under the above limits and are eligible to contribute.
Lower taxes in retirement. Roth IRAs offer some amazing tax-saving benefits in retirement! Because of the fact that both the contributions and the investment gains are income TAX-FREE when taken in retirement, they do NOT increase your tax rate, tax liability, Medicare Part B premiums or Social Security taxes!
No RMDs! That's right, ladies and gentlemen. Another benefit of the Roth IRA is that your account balance is not subjected to the (widely dreaded) required minimum distributions after you hit age 70.5. All those other retirement accounts, like 401(k)s and traditional IRAs, are subject to RMDs.
With a Roth, you've got more control over when you spend your money and aren't forced to take withdrawals... which allows your money to continue growing in a tax-free vehicle for a much longer period of time.
Downside. For 2018, the total contributions you can make to both traditional and Roth IRAs cannot be more that $5,500 ($6,500 if you're age 50 or more).
However. You can get an unlimited amount of money into a Roth by way of a "conversion". Traditional IRAs and qualified plans... like 401(k)s, 403(b)s, 457s and TSPs... can be converted into Roth IRAs. Just remember that those never-been-taxed converted funds that are rolled over to a Roth IRA are subject to income taxation. And the conversion must take place by December 31st.
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Don't be afraid of paying taxes today! Convert money from a traditional IRA to a Roth IRA if you're worried about higher taxes in the future. Or in a year of lower taxes (due to losing your job, switching jobs, going to part-time employment or retirement... causing you to earn less and be in a lower tax bracket).
Friends, these Roth conversions can be incredibly valuable financial planning opportunities. In fact, I'll bet your tax bracket is lower than normal due to the new tax laws... and a Roth conversion is much more valuable when you're in a lower tax rate environment.
You may have noticed that I've been spending a lot of time lately writing about Roth IRAs. Well, I happen to think that they're a tremendously underutilized retirement savings opportunity (that will soon no longer be available). It's unfortunate that emotional biases against paying taxes today often hold people back from taking full advantage of Roth savings.
Perhaps you need to "rewire" the way you've been conditioned to think about taxes... and consider the benefits of paying taxes today in exchange for the tax-free growth, tax-free income and tax-free inheritance benefits of the Roth IRA.
Lookin' out for y'all... as always,