You may ask what is a Roth IRA and why is it something that might make sense for me? The Roth IRA is a powerful account type established in 1997. Directly contributing to a Roth IRA (unless over the income threshold) allows the account owner to potentially benefit from tax-free growth and tax-free withdrawals (if certain requirements are met). Contributions are made on an after-tax basis. You can withdraw any contributions at any time and the potential earnings can be withdrawn after you reach the age of 591/2. I’ve heard the funds in a Roth referred to as “golden” in the sense that the funds within the account can provide much flexibility on both the contribution and withdrawal side.
On the contribution side, any funds you invest in your Roth IRA are eligible to be taken out for whatever purpose as long as the first contribution was at least five years ago. We’ve seen clients choose this way of saving for College Expenses, Home Purchases and of course Retirement. There is an income threshold that the IRS has mandated so confirm you are within the parameters to contribute directly, otherwise consider the other options available.1
We would be happy to discuss how a Roth IRA fits into your financial picture. You have a few ways of putting funds into a Roth IRA that we could explore:
- Choose the Roth 401(k)/403(b) Option for your Employer Plan
Keep in mind you would be giving up the tax deductions for contributions to the pre-tax account type now but would be saving after-tax dollars until you decide to take a distribution, likely tax free.
- Convert all or a portion of your Traditional IRA to a Roth IRA
In coordination with your tax advisor, we will look at the options to convert your Traditional IRA to a Roth IRA. Since tax rates are historically low, it may make sense to consider for 2020.
- Consider the Two-Step Roth Contribution
If you or your spouse have a retirement plan available at work, there is a limit for the deductible contributions you can make to a Traditional IRA. To put as much as possible in a tax-advantaged savings vehicle, you can still make nondeductible IRA contributions up to the limits. You would then have the option to convert that contribution to a Roth IRA. So, the first step is to make the nondeductible IRA contribution, the second is to convert the nondeductible IRA contribution to your Roth IRA. The understanding is that you pay the taxes on the converted portion in the year the transaction is made.
- Contribute to a Roth IRA annually up to the maximum contribution level or amount of income earned, whichever is less
If you are under the income limits, then you can contribute directly to a Roth IRA if you have earned income. There is also a provision for a spousal contribution as well.1
Call us at 703-757-8020 or connect with us at your next portfolio review.
1For single taxpayers, eligibility phases out for modified adjusted gross incomes (MAGIs) between $124,000 and $139,000 for the 2020 tax year. If you are married filing jointly, eligibility phases out between $196,000 and $206,000. 1
AOG Wealth Management is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at aogwealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.