Do you have a Roth IRA? If you never heard about it, I hope this article will convince you to open one. Roth IRA is a tax-exempt investment account that allows you to make after-tax contributions to save for retirement. The Roth IRA has a tax free status. It is a great way to save for retirement and meet your financial goals without paying a dime for taxes on your investments. The Roth IRA offers you a lot of flexibility with very few constraints.
1. Plan for your future
Opening a Roth IRA account is a great way to plan for your retirement and build your financial independence. The Roth IRA is an excellent saving opportunity for many young professionals and pretty much anyone with limited access to workplace retirement plans. Even those with who have 401k plans with their employer can open a Roth IRA.
If you are single and earn $122,000 or less in 2019, you can contribute up to $6,000 per year in your Roth IRA. Individuals 50 years old and above can add a catch-up contribution of $1,000. If you are married filing jointly, you can contribute the full amount if your MAGI is under $193,000.
There is a phaseout amount between $122,000 and $137,000 for single filers and $193,000 and $203,000 for married filing jointly.
2. No age limit
There is no age limit for your contributions. You can contribute to your Roth IRA at any age as long as you earn income.
Minors who earn income can also invest in Roth IRA. While youngsters have fewer opportunities to make money, there are many sources of income that will count – babysitting, garden cleaning, child acting, modeling, selling lemonade, distributing papers, etc.
3. No investment restrictions
Unlike most 401k plans, Roth IRAs do not have any restriction on the type of investments in the account. You can invest in any asset class that suits your risk tolerance and financial goals.
4. No taxes
There are no taxes on the distributions from this account once you reach the age of 59 ½. Your investments will grow tax-free. You will never pay taxes on your capital gains and dividends either. Roth IRA is a great saving tool for investors at all income levels and tax brackets.
With an average historical growth rate of 7%, your investment of $6,000 today could bring you $45,674 in 30 years completely tax-free. The cumulative effect of your return and the tax status of the account will help your investments grow faster.
5. No penalties if you withdraw your original investment
While not always recommended, Roth IRA allows you to withdraw your original dollar contribution (but not the return) before reaching retirement, penalty and tax-free. Say, you invested $5,000 several years ago. And now the account has grown to $15,000. You can withdraw your initial contribution of $5,000 without penalties.
6. Diversify your future tax exposure
It is very likely that most of your retirement savings will be in a 401k plan or an investment account. 401k plans are tax-deferred and you will owe taxes on any distributions. Investment accounts are taxable and you pay taxes on capital gains and dividends. In reality, nobody can predict what your tax rate will be by the time you need to take out money from your retirement and investment accounts. Roth IRA adds this highly flexible tax-advantaged component to your investments.
7. No minimum distributions
Unlike 401k plans, Roth IRA doesn’t have any minimum distributions requirements. Investors have the freedom to withdraw their savings at their wish or keep them intact indefinitely.
8. Do a backdoor rollover
Due to recent legal changes investors who do not satisfy the requirements for direct Roth IRA contributions, can still make investments to it. The process starts with a taxable contribution, up to the annual limit, into a Traditional IRA. Eventually, the contributions are rolled from the Traditional IRA to the Roth IRA.
9. Roth conversion from Traditional IRA and 401k plans
Under certain circumstances, it could make sense for you to rollover your Traditional IRA and an old 401k plan to Roth IRA. If you expect to earn less income or pay lower taxes in a particular year, it could be beneficial to consider this Roth conversion. Your rollover amount will be taxable at your current ordinary income tax level. An alternative strategy is to consider annual rollovers in amounts that will keep you within your tax bracket.
10. Estate planning
Roth IRA is an excellent estate planning tool. Due to its age flexibility and no minimum required distributions, Roth IRA makes it a good option for generation transfer and leaving a legacy to your beloved ones.
Roth IRA is an excellent starting point for young professionals. It can help you reach your financial goals faster. So open your account now to maximize its full potential. Investing early in your career will lay out the path for your financial independence.
If you’d like to discuss how to open a new Roth IRA or make the most out of your existing account, reach out to me at firstname.lastname@example.org or +925-448-9880.
You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.
About the author:
Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families. To learn more visit our Private Client Services page here.