Hi. This is Dave Piatkowski here with Dickinson Investments. I would like to take a moment of your time to discuss Roth IRAs with you today. I know some of you are probably thinking, “Roth IRAs? I don’t even know what a traditional IRA is exactly.” But the difference between the two is very important and that’s why I’d like to discuss that with you.
A few features of a Roth IRA are pretty important. Unlike a traditional IRA, when you take money out of a Roth IRA, because the funds that went in were after tax, when you pull money out of a Roth IRA, as long as you have met the criteria of being over age 59 and a half and having had the Roth IRA open for at least five years, everything you take out of the Roth IRA is going to be tax-free.
That’s pretty powerful! A traditional IRA not only is taxable when you take money out. It’s also subject to required minimum distributions when you turn age 70 and a half. The government isn’t interested in required distributions of a Roth IRA simply because when you take money out, there are no tax ramifications. Thus, they couldn’t care less if you take out money or not.
One of the main differences though during tax time which we’re in right now is a big feature that people think about in some cases: when you make contributions to a traditional IRA, those contributions are tax-deductible, and they can lower your tax bill or give you a larger refund. On the other hand with a Roth IRA, there are no deductible contributions; however contributions just add to your after-tax account value. The other thing to keep in mind is when you’re in both traditional and Roth IRAs, when you are under age 50, the limits on what you can put into a Roth or traditional IRA is $5,500.
Once you hit that magic birthday of age 50 or older, you have what’s called a catch-up provision of $1,000, so you can put up to $6,500 into the IRA as long as you or your spouse, if you’re married, have earned income up to that level.
There are income ceilings to consider. So in other words, if you make too much money, you couldn’t contribute to a Roth IRA – but I don’t want to go into too much detail now at this time.
One of the other features that I think is very important regarding Roth IRAs is that you do have the ability – even if you earn too much money or if you’ve already contributed your maximum for the year – to still do Roth conversions (i.e. going from your traditional pre-tax IRA into your Roth IRA). We can sit down with you and help you decide if that would be beneficial for you. But the advantage to you is that sometimes people will come in each year and just make a small conversion from their traditional IRA to the Roth IRA, perhaps $1,000 or $5,000.
You will want to stay in the same tax bracket because a conversion unlike a contribution is a taxable event. You’re just essentially moving money from your left pocket to your right pocket. However, once that money is in there, it grows tax-free forever.
So when you combine the contributions to the Roth along with the availability of these Roth conversions, over time one can have a very large Roth IRA of retirement money they will never have to take out if they don’t want to, they can access to the money tax-free, and on top of that it passes on more tax favorably to the next generation.
This is why my wife and I have been strong proponents and involved in contributing to our Roth IRAs since the late 1990s when they started. If you should have any questions regarding Roth IRAs or traditional IRAs in general, please don’t hesitate to give us a call. Thank you.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]