Roth IRAs are still a relevant retirement savings tool.
You have heard about Roth IRAs.
You know they are different from traditional IRAs.
But how are they different?
What unique benefits do they offer?
According to a recent MarketWatch article titled “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions,” Roth IRA accounts present two significant benefits for some.
What are they?
With a Roth IRA, you pay taxes on your income pre-contribution.
A traditional IRA defers your taxes on this income until you make withdrawals.
This means a traditional IRA is the strategy to use if you need a tax break upfront.
A Roth is beneficial tax-wise if you expect to have the same or a higher income in retirement.
For those expecting a lower income, a traditional IRA would make better sense.
There are a few rules for Roth withdrawals to qualify for this special treatment.
What are they?
First, your Roth IRA needs to open for more than five years.
Second, you need to be at least 59½, disabled or dead.
When does the five year countdown begin?
The clock starts on the first day of the tax year in which you make your initial contribution.
Does it matter how this initial contribution is made?
Nope, it can be a conversion or a regular annual contribution.
Account is exempt from RMDs.
Traditional IRAs require owners to take an annual required minimum distribution when reaching age 70½.
This is not the case with your Roth IRA accounts.
You can dip into them when you need the money, allowing it to continue to grow for you.
If money remains when you die, then it really shines as a great estate planning tool.
Withdrawals are not subject to income tax when taken by your beneficiaries, unlike with a traditional IRA.
How much can you contribute to a Roth IRA?
Contributions are limited each year to the lesser of two amounts.
The first amount is the annual contribution limit each year.
The second amount is your earned income for the year.
What is included in calculating earned income?
The math will include salary and wage income, bonuses, self-employed income, and alimony.
What are the rules if you are married?
You can include the amount your spouse earned in the income total.
How long can you contribute to a Roth IRA?
Contributions may be made after you turn 70½ -- provided you are still working.
Traditional IRA contributions end at age 70½.
Can you convert a traditional IRA into a Roth IRA?
This is the fastest way to significantly fund a Roth.
By doing so your conversion will be taxable.
Converting before the end of the year will increase your income tax bill.
However, the federal income tax rates are low at this time.
Making a conversion now could be in your best interest.
If you have further questions regarding your specific circumstances, work with an experienced estate planning attorney or financial advisor.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: MarketWatch (March 27, 2018) “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions”