To Roth or Not to Roth

Investors have many different options when it comes to saving for retirement. One of the best options for the Millennial generation is the Roth IRA. While Roth IRAs don’t allow for the upfront tax deductions like a traditional IRA, they do offer some alternative incentives. I’ve outlined below 8 interesting facts about Roth IRAs I think you should know.

 1.     Did you know the Roth IRA wasn’t established until around 20 years ago in 1997? That makes it younger than the Millennial generation! The initial goal of establishing the Roth IRA was to help Americans save for retirement without decreasing the government’s tax revenue. The accounts are also named after the sponsor of the legislation that created them, the late Senator William V. Roth, Jr. of Delaware.

 2.     Roth IRA contributions are made post-tax, meaning you’ve already paid income tax on them. Unlike traditional IRA contributions, they won’t offer a deduction when you file your taxes. The investment earnings and growth, however, grow tax-free for the life of the account.

 3.     One of the biggest uncertainties younger savers face when planning for retirement is related to future tax laws. However, if you’ve already paid taxes on the funds going into your Roth, then you’ll have the peace-of-mind of knowing what you pull out in the future will have no impact on taxes due. 

 4.     The maximum contribution (in 2019) to a Roth IRA is $6,000. Unless you are over age 50, which allows you to make a “catch-up” contribution of $1,000, for a total of $7,000. You must have earned income for the year that is at least equal to the amount you plan to contribute.

5.     Direct contributions to a Roth IRA are subject to income limitations set by the IRS. If you’re a high wage earner, you may not be able to contribute directly. There is, however, a backdoor Roth IRA contribution strategy which involves making a non-deductible traditional IRA contribution and then converting it at a later date to a Roth IRA. This type of strategy can be complex, so I recommend working with a professional to make sure you’re following all of the rules.

 6.     A Traditional IRA account cuts off the ability to contribute to the account at age 70½. However, a Roth IRA allows for contributions no matter your age, as long as you have enough earned income to match or exceed the amount you contribute to the account. 

 7.     You can withdraw contributions you made to a Roth IRA at anytime without paying any taxes or penalties. (Although, I don’t recommend doing this before retirement.) You can’t, however, take out the earnings in the account until you’re at least 59½ and the account has been open for five or more years. There are also a few other exceptions to taking out the earnings tax and penalty free.

8.     One last good thing about Roth IRAs is they never require account holders to take a distribution. Since there will be no taxes due on the withdrawal, the IRS doesn’t care when you take the money out of the account. It can even be left as an inheritance for future generations.

 When you’re deciding which type of retirement account is best for you, make sure you consider all of the available options and their risks and benefits. If you’re still not sure, ask a Certified Financial Planner™ professional (like one of us) for help.

- Margaret Gooley, CFP®, Worley Erhart-Graves Financial Advisors