Credit: Shutterstock photoBy: Robbie Schoonmaker CFP, CPA, a financial advisor on NerdWallet’s Ask an Advisor.
It’s not hard to find someone trying to sell you something that seems too good to be true—and often it is.
But the Roth Individual Retirement Account, offered by none other than the United States government, has some features that are indeed real, even though they may seem more like fiction. And while they aren’t for everyone, they are worth considering for the following reasons:
1. Avoid tax forever and still feel good about yourself
Of course you’ve always wanted to quit paying taxes, but somehow that image of Al Capone being led off to Alcatraz always gets in the way. But with the Roth IRA, no taxes are ever due on withdrawals as long as they are made after age 59 ½ (or before then with a few other exceptions). The tradeoff is that you don’t get a deduction on your contributions when you make them, but that could be a small price to pay for tax-free retirement income.
2. Keep it as long as you like
Generally, the IRS only has so much patience with folks not paying taxes before it brings down the hammer. With traditional IRAs and 401(k)s, you are required to start taking funds out during the year after you reach age 70½ and every year thereafter. But the Roth IRA has no required minimum distributions and no maximum account values — you never have to remove a dollar.
3. You can change your mind
Everyone is looking for commitment these days — the guy at the cell phone booth at the mall, the satellite TV lady on the phone, your kid who needs the car on Saturday night.
With all that pressure, did you know that putting $5,500 into a Roth IRA this year and leaving it until retirement is a commitment you can make? The good news is, in an emergency, you can change your mind and still not have to pay taxes or penalties. Because the money you put into the Roth has already been taxed, you can take it out again, at any time and for any reason, without paying the IRS a dime. And while removing the earnings on those contributions from your Roth IRA will likely cost you taxes and fees, you aren’t committed until age 59½ with regard to your contributions. Now it’s not going to help you retire if you keep taking money out of your retirement account, and you shouldn’t view your investment portfolio as your emergency savings, but it still provides more flexibility than a traditional IRA if the walls are falling in.
4. Everyone Qualifies (well, almost)
OK, I’m stretching a little here — it is possible that you don’t qualify for a Roth IRA. But anyone who has earned income during the tax year does qualify.
But wait, you say, I thought I couldn’t contribute to a Roth IRA if I made too much money? While it is true that your direct contributions can be limited based on income, recent changes have made it possible for anyone with earned income to get money into a Roth IRA every year through what is known as a back-door Roth IRA contribution. Essentially, you can make non-deductible contributions to a traditional IRA and then convert them to a Roth IRA.
So while I can’t promise that the Roth is right for everyone, it is something that you should investigate with your financial planner. In this case, too good to be true — isn’t!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
