As a CERTIFIED FINANCIAL PLANNER™, it is incumbent upon us to be balanced. In this current environment, a much needed tax diversifier is worth a legitimate conversation, and that tax diversifier is the Roth IRA. Many believe taxes may be going higher in the future, and I am here to say let's mitigate the impact of future rising taxes. Here are some tips to why a Roth IRA is an important tool in financial planning and why "you" should open one today.
- Tax Deferred Growth and Tax Free Withdrawal: The monies inside of the Roth Ira grow tax deferred meaning that you do not owe taxes on the dollars as it grows. The dollars you place inside of a Roth IRA, which maxes out at $6,000 for individuals under the age of 50 and $7,000 over the age of 50, grow inside the Roth IRA and become tax free on all dollars after the age of 59 1/2. It is a beautiful tool to help bolster the overall retirement income strategy.
- Wonderful Savings Tool with Liquidity: Many people do not realize they can take out the principle of their account. That's right, you can access the principle contribution of your account at any time. If you place $1 inside of a Roth IRA today, you can immediately take that dollar out of the Roth IRA. So this provides you with a savings account with advantages. You can place savings inside of the account for emergency purposes and also choose how or when to invest it based on your current circumstance.
- Starting Sooner Rather Than Later: The reason I am saying consider this as soon as you can is based on IRC Section 408A(d)(2)(B). This speaks about the 5-year rule for conversions and rollovers to accounts. The rule states that the account must have been in existence for a minimum of 5-years before any withdrawals of converted assets, gains, or rollovers can be distributed free of penalty tax, which is 10%. Furthermore, the account owner would also need to have reached 59 1/2 years of age to make all distributions qualified. This is important to understand and is the real reason to open a Roth IRA today and begin funding. Also, the sooner you begin funding a Roth IRA, the longer time you have for the account to strive for growth and potentially amass assets.
- No RMD Requirement: Required minimum distributions often place retirees in a hard place. They are forced to begin taking withdrawals on assets they really do not need at that time. The Roth IRA avoids the RMD requirement for original Roth IRA owners which means they can allow the account to grow as long as they are alive. It is a great advantage because this allows for most to invest aggressively within the account without the need of forced selling.
Whether you feel like a Roth IRA is for you, you need to contact a professional and make sure you are eligible to invest directly into the Roth IRA. There are IRS rules that one must follow to directly invest into a Roth IRA. A financial professional can help you not only understand the rules, but also help to possibly find ways to place dollars inside of a Roth IRA regardless of your income.