Participating in your company 401(k) or similar plan (i.e., 403b, SIMPLE IRA, 457) is a great way to save for retirement. You can make significant contributions while deferring taxes until retirement. Although these accounts are useful for retirement savings, there are additional ways to save for retirement. Topping my list is the Roth IRA. Here are five reasons why you should consider a Roth IRA:
The most significant benefit is that the earnings grow tax-free. This gives you the advantage of allowing your future earnings to compound without having to pay taxes related to those earnings along the way.
Once you turn 59½, you can withdraw from your Roth IRA tax-free, as long as the account has been established for at least five years.
No Maximum Age Restrictions
If you want to make Roth contributions later on in life, no age restrictions are preventing you from doing so. However, you must have earned income that is greater than, or equal to, what you contribute. Earned income includes wages/salary stemming from your active participation in a business.
Required Minimum Distributions (RMDs) are annual amounts that the IRS requires you to withdraw from tax-deferred accounts. If you have a tax-deferred account, such as a 401(k) or Traditional IRA, once you turn 70½, you are forced to withdraw funds and pay taxes each year. There are no RMDs for Roth IRAs, which means you decide when you want to withdraw funds and how much you wish to withdraw.
Consolidate Retirement Savings
If you participated in a Roth 401(k) at your previous employer, you could roll over those funds to a Roth IRA. This is similar to rolling over pretax 401(k) funds to a Traditional IRA. You are moving assets from an employer plan (Roth 401k) to your more personalized plan (Roth IRA). Once your Roth funds are rolled over, a trusted advisory firm can manage the portfolio for you, providing you peace-of-mind through a more tailored investment approach.
Other Things To Consider:
Income Limits To Contribute
High-income earners may not contribute to a Roth IRA. To learn if you qualify, here is a breakdown of the income limits for 2019:
Taxes & Penalties For Withdrawing Earnings
If you need to withdraw Roth funds before age 59½, you can take out contributions at any time without taxes or penalties. Withdrawing earnings is different. In most cases, if you withdraw earnings before age 59½, you must pay income taxes PLUS a 10% penalty on those funds. You may be able to avoid the 10% penalty under specific circumstances. To be safe, consult a qualified professional before withdrawing any money from a Roth IRA.
Several vehicles can help you reach your retirement goals. Given its tax-free nature, the Roth IRA is in a league of its own. As your career advances and your income grows, you may eventually lose the opportunity to invest in a Roth IRA. If you want to save more for retirement now and you believe your income will qualify you for the foreseeable future, I strongly recommend a Roth IRA.
If you have any questions about the Roth IRA, please feel free to contact me directly.
I hope you enjoyed reading!
Joshua J. Baird
Investment Adviser Representative