If you’re serious about your estate planning and haven’t yet created an effective retirement plan, you could be in for a rude awakening later in life. Without a plan to secure your retirement, your estate planning efforts could be for naught. Anything that you thought you’d be able to leave behind for your heirs is instead likely to be consumed by the costs of your own retirement. The good news is that there are some wonderful retirement planning options out there, including the Roth IRA. In fact, this type of individual retirement account can be one of the best ways to ensure that your retirement plan accomplishes all your most important goals.
What is the Roth IRA?
If your employer doesn’t offer a 401(k) plan for employees, then the individual retirement account (IRA) can be one of the best options available to you. The IRA is a retirement savings account that takes advantage of time and compound interest to grow during your working years so that you have the savings you need when you retire. There are two main types of IRAs: the traditional IRA, which enables you to make pre-tax contributions to the account, and the Roth IRA that allows you to invest contributions made up money that has already been taxed.
These two different options can provide different benefits, of course. For many workers, the traditional IRA allows them to save more money because they contribute untaxed dollars. The drawback to that is that their later withdrawals from the account are taxed at whatever tax rates might prevail in the future. The Roth IRA takes a different approach. Since the money used for contributions has already been taxed, those future withdrawals can be made tax-free.
What Kind of Tax Advantages Does It Offer?
On the surface, the traditional IRA might seem like it offers better tax advantages, but that’s not necessarily true. For while those pre-tax contributions do enable you to make your contributions with less pain now, they do limit the amount of money that you can withdraw later in life. In other words, that tax bill comes due eventually. Moreover, most of us have no idea what kind of tax rates we might be looking at thirty or forty years in the future. With a government that is nearly twenty trillion dollars in debt, many analysts expect future tax rates to be higher than they are today. The bill always comes due eventually.
But here’s the thing to remember: every sound retirement plan involves some type of sacrifice in the present. There’s almost always something that you need to surrender now to ensure that you have financial stability in the future. In this case, those taxable contributions might represent a slight added burden now, but they can create a much brighter, tax-free future retirement. With a maximum contribution of $5,500 a year, beginning in your twenties, you could end up with more than a million dollars in retirement savings by the time you leave the workforce – and it would all be tax-free retirement income!
Are There Limitations on Contributions?
There are several important rules that you need to know about – especially when it comes to contributions. For example, you can only contribute money from earnings. You can’t use money that someone gave you, or excess funds from student loans. If you only made $2,000 last year, you can’t turn around and contribute $5,500 because you’re not allowed to contribute more than you made in income. In addition, there are income limits that can impact how much you’re allowed to contribute. If you’re single and making more than $118,000, your allowable contribution amounts are reduced.
What Kinds of Investments are Available?
The Roth IRA provides a wide variety of options for your investments. You can invest in traditional stocks or bonds, Certificates of Deposit, mutual funds, and real estate. It’s important to choose the options that are appropriate for your age and risk tolerance. Younger workers can typically achieve the best results by investing in stocks, with an emphasis on mutual funds with sound stock portfolios. Older workers often want to emphasize investment options that reduce their risk of loss. CDs and bonds are great examples of these lower-risk choices.
Can You Access the Money Before Retirement?
The Roth IRA offers other benefits as well. It is a retirement vehicle, so the idea is to put money into the account and let it grow over many years so that you have a nest egg when your working years are complete. However, you always have the option of withdrawing your contribution amounts if you really need that money. So, for example, if you suddenly had a medical emergency that required you to come up with funds in a hurry, you can withdraw your contributions without any tax or penalties. You cannot, however, withdraw any money that those contributions have generated without facing taxes and a ten percent penalty.
There are some important exceptions, like homeownership. When you dip into your Roth IRA for funds to buy your first home, you can take out every cent of contributions and up to $10,000 of earnings without any tax or penalties. That only applies, however, for accounts that are at least five years old. You can do similar things for a child’s educational expenses – though you’ll still have to pay taxes if you withdraw money prior to age 59 ½.
Professional Help Is Important
Of course, your retirement is not something that you should experiment with through trial and error. In most instances, you only get one shot at getting it right, so a professional approach to your retirement plan is essential to improving your odds of success. At Frank & Kraft, Attorneys at Law, our experienced retirement planning experts can help you to incorporate a Roth IRA into your retirement strategy, to ensure that your broader estate planning efforts remain on track. You deserve to have a plan that works, and we’re committed to helping you achieve that goal. To learn more about how we can help you with your Roth account, call today at (317) 684-1100, or contact us at our website.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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