THE ROTH IRA IS SO GOOD THE FEDS MADE A MISTAKE!
When the Federal Government created the IRA and 401-K ROTH, in 1997, I did not pay much attention, because my income was too high to contribute. It was later I realized as Joe Biden once said under a live mic- “This is a BIG FRACKING (you can substitute his word) DEAL!”
Congress for good reasons has a lower approval rating than poisonous snakes! I was shocked they allowed an investment and savings tool this good!
2020 ROTH IRA CONTRIBUTION LIMITS
It was only when my employer, BP, offered the ROTH 401K, I discovered there are ZERO income limits to contribute to the ROTH 401-K Plan. Heck – Warren Buffet and Bill Gates can contribute to a ROTH 401K!
In addition to my regular pre-tax 401-K contributions, I started making contributions each pay period to the ROTH 401-K. When I departed BP, I rolled this money into a ROTH IRA.
ADVANTAGES OF THE ROTH IRA
YOU EXPECT TO BE IN THE SAME OR HIGHER TAX BRACKET WHEN YOU RETIRE
I am clueless where Federal taxes will be in 2021. Tax rates next year are dependent on which of the two political parties control the Whitehouse and Congress. Regardless of where taxes go next year, there is a higher probability Federal taxes will continue to climb over my lifetime. Because our government is pushing towards insolvency as fast as they can! If my tax rate stays the same or goes higher, a Roth IRA will save the most in future taxes.
ZERO REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
When we turn 70 1/2 the federal government requires minimum distribution from most retirement accounts, for one simple reason. The government NEEDS the tax revenue, because today we operate at ~$1 Trillion deficit annually! Because you already paid taxes on your Roth IRA contributions, all future withdrawals are TAX-FREE! I personally like paying as few taxes as I legally can!
Roth 401(k)s, which are taxed similarly to Roth IRAs, do HAVE RMDs. You can avoid the taxes by rolling over your Roth 401(k) into a Roth IRA.
EARLY ACCESS TO YOUR CONTRIBUTIONS
The ROTH, while an excellent retirement savings account can be used as your Emergency Savings account., College Savings, Anything You Want Savings.
A Roth IRA contributor has the ability to take contributions (Not Earnings) out at any time. It is recommended you maintain six months emergency savings. If you contribute the maximum of $6,000 per year to a ROTH, for ten years, your contributions total $60,000. Those funds can be withdrawn in case of an emergency or family need. As your ROTH contributions are made with After Tax dollars, you owe zero taxes on the funds you withdraw. You can withdraw earnings but will pay penalties and taxes.
Roth contributions can be used towards college savings as well with an additional benefit. The gains can also be used towards college expenses without incurring a penalty, however you will be taxed on that portion of the withdrawal. An investor who has contributed for 20 years will accumulate $120,000 in contributions that can be used towards college. It is recommended to keep the profit portion in the Roth and use that towards retirement.
Another benefit is the ability to withdraw up to $10,000 of Roth IRA earnings, in addition to contributions, towards the purchase of your first home without paying a penalty or taxes. To qualify as a first-time homebuyer, you or your spouse must not have owned a principal residence within the last two years. Remember that IRAs are individual retirement accounts, so you and your spouse may both be allowed to withdraw up to $10,000. Another requirement to withdraw the earnings tax and penalty free is that you must have owned the Roth IRA account for at least five years. If you started your Roth IRA less than five years ago you will owe income tax on the earnings.
NOT ELGIGIBLE TO CONTRIBUTE TO A ROTH IRA – THERE ARE WORKAROUNDS
An existing traditional IRA can be converted into a ROTH. However, you are required to pay income taxes on any contributions that were deductible, as well as any investment gains within the account before the conversion. After paying taxes due you have the benefits of a ROTH, tax free income!
When you invest in a Roth IRA, you fund it with money you have already paid taxes on. That money grows tax free and when you take it out after age 59 1/2, it comes out completely tax free. For 2019 (you have until April 15, 2020 to make your 2019 contribution) and 2020, the contribution limit for those under 50 years of age is $6,000 per year. Those over 50 can contribute an extra $1,000. Those with higher incomes may not be eligible to directly contribute to a Roth IRA. An existing traditional IRA can be converted into a Roth. However, you are required to pay income taxes on any contributions that were deductible, as well as any investment gains within the account before the conversion. After paying taxes due you have the benefits of a ROTH, tax free income!
I consider the Roth IRA one of the best available financial and investment tools. Saving in a Roth IRA early was one of my best decisions! Consult with a professional financial planner to ensure you are on a successful path towards retirement.
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I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life. It is my time to serve and give back.
I started my first business at ~13 years of age (small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and happy to share my personal finance and investment lessons learned with you.
However, I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog, as recommendations for your personal situation. For individual finance advice please seek your own licensed CPA or fiduciary financial advisors.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.