2019 Best ROTH IRA Guide (what you need to know)
Here are some ideas to help you build Roth account balances to help get to 1/3 of your savings:
- Every couple should be contributing the maximum (now $5,500) to backdoor Roth IRAs annually.
- Even if you have significant pre-tax IRAs and nowhere to move them, go ahead and pay the pro-rata taxes. Remember, you are only pre-paying taxes you’ll have to pay later, while increasing the length of time for tax-free Roth growth.
- Consider dividing contributions between Roth and pre-tax when your employer accounts allow. This can be 1/3 to 1/2 in your Roth and the rest in pre-tax. Your CPA can help you plan to contribute enough pre-tax to stay out of the top tax bracket (if possible).
- When you change jobs, roll part of your employer account into a Roth IRA. Again, tax planning with your CPA will be very useful.
- During bear markets (sustained drops in the market of at least 20%) and corrections (drops of 10% – 20% over relatively short periods), convert as much as possible to a Roth IRA and change your work allocation to 100% Roth.
- Finally, don’t forget to make Roth conversions between your retirement date and starting RMD’s.
How to save ROTH IRA
Having a reasonable allocation to these three areas during retirement will allow you to draw from a combination of accounts and control your income tax bracket post-employment.
Keeping track of your progress toward the division during the years leading up to retirement will help you make decisions about allocating extra savings and will help you move toward the Roth when opportunities arise.
At least annually, compare the balances in each of these tax pails so you can track progress.
Having this goal will motivate you to think twice about the standard advice of allocating all money possible to pre-tax accounts before moving on to Roth and brokerage.
2019 ROTH IRA Retirement Tips
After retirement (and even before), take aggressive advantage of market drops with Roth conversions.
This will help reduce your RMDs at age 70.5 and increase the balance of tax-free assets you can pass along to your heirs at death.
Because Roth IRAs are not subject to RMDs during the lifetime of the owner, you’ll have the advantage of withdrawing funds only when necessary, leaving the balance to continue to grow tax-free during your lifetime.
In addition, while your heirs will be required to distribute inherited Roth IRAs over their lifetimes, the accounts will remain untaxed until they are emptied.
2019 ROTH IRA Questions
Life at 70: Do you foresee taking regular IRA withdrawals in your 70s? Or will you predominantly live off of other income? Tax-deferred IRA and 401(k) accounts are subject to Required Minimum Distribution (RMD) laws, which kick in the year you turn 70.5 years old. The IRS forces you to withdraw a certain amount each year, which is based on your age and calculated as a fraction of your total IRA/401k balance. This is government’s way of collecting tax revenues from you that they have spent decades waiting to receive.
Roth IRAs, meanwhile, are not subject to RMDs. This means you never have to worry about how much you take out year-to-year when you turn 70. The notion of having to take withdrawals on your own money may sound like a first-world problem that you will gladly confront down the road, but you may not want to touch your savings at that point if you have other sources of income. With a Roth IRA you never worry about that.
What about the kids? Along these same lines, if you desire to leave behind a certain amount to your heirs, RMDs can disrupt that. As money comes out and is taxed, the tax-deferral benefits slowly fade. Also, RMDs do not disappear when you die. Whoever inherits your tax-deferred savings must continue taking minimum amounts each year.
RMDs do kick in on Roth IRAs after the owner’s death. However, because no taxes are owed the impact is muted when heirs take those distributions.
Sort-of retired? The years leading up to retirement, or just barely into retirement, may provide a sweet-spot for timing a Roth IRA conversion. For example, your income could be really low if you are not receiving a paycheck and have yet to begin receiving certain benefits like Social Security or pension payments. You may squirm, understandably, at the notion of paying taxes on a six-figure (or seven-figure) IRA balance all at once. So, instead of converting a massive balance all in one year, spread it out and do multiple, smaller Roth IRA conversions over a series of years. This will help suppress your tax rate.
You want to make contributions: While anyone can do a Roth IRA conversion on whatever amount they wish, you cannot make annual Roth IRA contributions if you earn too much money (for 2018, income above $135,000 if single or $199,000 if married). If you plan to contribute any amount up to the annual cap of $5,500, first make sure that your income qualifies you.
This makes the distinction between a Roth IRA contribution and a conversion an important one. Suppose your income is rising quickly year-to-year. While you may qualify to make Roth contributions today, you may not be able to for long. As a result, it might not make sense to do a Roth IRA conversion if you won’t be able to contribute to it in the future. Financial planning is about skating to where the puck is going to be, not where it is now.
When is a good time to do a Roth IRA conversion? The end of the year is ideal because you should know where your income will end up for the year. It is easier to estimate your tax rate and overall tax burden in December than it is in February.
2019 ROTH IRA Advantages Conclusion
There are a number of factors that can sway your Roth IRA decision. Use these to get the ball rolling and to start planning ahead in the event this is something that will benefit you in the coming years.
Roth assets can be valuable as part of strategies for overall tax diversification, wealth transfer, or retirement income.
While potentially valuable to some, they could be inappropriate for others, depending on their estate planning goals, the likelihood of lower tax brackets in retirement or lower tax brackets of beneficiaries compared with those of the current owners, and a lack of ability to pay the resulting income tax liability from assets outside retirement assets.
Regular Roth IRA contributions are limited to a relatively small annual dollar amount, but continued over many years, compounding of investments can be powerful.
The same is true for nondeductible IRA contributions and subsequent Roth conversions.
Designated Roth accounts allow taxpayers to save almost four times as much as can be contributed to a Roth IRA.
Individuals can also convert assets to Roth IRAs, choosing to pay income tax now on the converted amounts to have future growth occur in the preferential Roth environment.
The different conversion methods available include converting assets from a traditional IRA to a Roth IRA, converting assets within a qualified retirement plan to a designated Roth account within the plan, and converting assets directly from a qualified retirement plan to a Roth IRA.
The law has evolved over the past several years to increase taxpayers’ ability to move assets into Roth IRAs via conversion.
An individual with both an IRA and a qualified retirement plan has additional strategies available.
He or she can directly roll any after-tax monies in the qualified plan to a Roth IRA to avoid the cream-in-the-coffee rule and get assets into Roth vehicles with potentially no corresponding income tax liability. If an individual has an IRA with both pretax and after-tax dollars, he or she can roll the pretax dollars into the qualified retirement plan and then convert the remaining dollars in the IRA, which, if done correctly, results in no income tax liability.
Other considerations in deciding whether to put additional assets into Roth vehicles include asset location, ripple effects due to higher taxable income, and the lower amount of credit protection afforded to contributory IRAs, compared with qualified retirement plans or segregated IRA rollover plans.
The elephant in the room is the potential legislative risk. Individuals should work closely with their professional advisers, including accountants, attorneys, and financial advisers, to review the overall risks in the context of the client’s individual situation.
Mintco Financial Advisors ROTH IRA Buffalo NY and Tampa Florida
We can assist you opening a ROTH IRA or in reviewing your circumstances and helping you decide if a Roth IRA conversion is appropriate for your immediate needs and long-term goals.
Call today for more information on Roth IRA conversions.
Call 716-565-1300 or 813-964-7100