First, let me start by saying I love Roth IRA’s. Before I get into why I love Roth IRA’s, I should explain what they are – and what they aren’t. A Roth IRA is not an investment. It is a type of account. Inside this account, you can put mutual funds, stocks, bonds, CD’s, ETF’s, and any number of other investments.
So, why do I think they are so great? Because of how they are treated for tax purposes. To get money into a Roth, you first pay taxes on it (usually from withholding on your paycheck) and then it goes into the account. Once the money is in, any growth is tax deferred, meaning you don’t pay taxes as long as you don’t take it out. But the best part about this type of account is once the money is in, and assuming you meet a few simple rules (most notably, you make it to 59 ½ years old and you’ve had the account open for five years), it has the potential to grow to $Insert,Large,Number,Here and never be taxed again!
Our country is currently over $17 trillion in debt and I won’t bore you with the details of unfunded liabilities in Social Security, Medicare, and Medicaid at roughly $125 trillion (according to usdebtclock.org). The government has two options: 1) Spend less. Seriously, when you’re done laughing, keep reading. Or 2) Raise taxes. (Side note: there is a third option, print more money. This is another article in and of itself – if you’d like me to write it, comment below.) I would never hold myself out as a tax expert, but logic would follow that at some point, taxes conceivably will be higher.
If you look at your 401(k), your regular IRA, pension, brokerage accounts and even to a certain degree your social security, all of these will provide you with taxable income at whatever tax rate you so happen to fall in when you take the income. It may make sense to have some money that you can get to tax-free if the government ever decides you are very wealthy because you have done such a great job saving. We’ve all heard about “diversifying our investments.” Try thinking of this as “Diversifying your taxes.”
They are so great, that even though the government encourages you to put money in them (and pay taxes up front to raise tax revenue), they limit how much you can do! Currently, you can put up to $5,500 a year ($6,500 if you are over 50 years old) and are also limited by the amount of income your household brings home. Even if you are limited, there are a number of ways to get money in, so talk to your advisor or CPA about income limits, Roth IRA conversions, Roth 401(k) conversions, and “back door” Roth IRA’s.
Additional fun facts (read: required disclosures): Please note that withdrawals from the account may be tax free, as long as they are considered qualified, and limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs, including their tax treatment.
Michael Bonfanti, CFP ®
Financial Advisor • Bonfanti Investment Services, LLC
Michael Bonfanti is a CERTIFIED FINANCIAL PLANNER ™ practitioner and owner of Bonfanti Investment Services, LLC. He focuses on individual and small business financial planning and investment management. For more information or questions, please contact him at 225-612-3984 or at firstname.lastname@example.org. Investment Advisory services are offered through Bonfanti Investment Services, LLC, a Registered Investment Advisor in the State of Louisiana. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult your financial advisor prior to investing.
This article was originally published in The Creole.