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Should You Have a Roth IRA?

5/23/2017

 
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Roth IRA accounts have been available since 1997. In a traditional IRA, you contribute pretax dollars that grow tax deferred, but are taxable upon withdrawal. Roth IRAs are for after tax contributions that provide tax free growth and distributions upon retirement.
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The magic of compounding means, the earlier you start, the greater the tax-free growth within the account. If you are 20 when you start making contributions, you could be looking at four doubles of your original contribution by the time you retire at age 60.  That means a $6,000 contribution this year could grow to $96,000 allowing you to potentially create a constant flow of tax free income for your retirement years.

Another reason to open a Roth IRA is the flexibility it can provide to fund emergencies that may arise over your lifetime.

The Five-Year Rule

You can always withdraw any Roth IRA contributions without taxes, after all, you paid income tax on the money prior to making the contribution. However, if you haven’t had the Roth IRA open for at least five years, your distribution could still be subject to a 10% tax penalty, similar to the early withdrawal penalty for traditional IRAs.
The five years for withdrawals begins when you open the account, not when you make subsequent contributions. There is also a five-year rule for Roth IRA conversions that start in January of the year you make a conversion.  This additional rule was enacted to prevent someone from using a Roth IRA conversion to avoid early distribution penalties from traditional IRA withdrawals.

Who qualifies for a Roth IRA

If you have a modified adjusted gross income of less than $122,000 and are single or less than $193,000 if married filing jointly, you can make Roth IRA contributions of 100% of your income up to $6,000 if younger than age 50 or $7,000 if age 50 or older.

Back-door Roth IRAs

Because there are no income limitations for converting traditional IRAs to a Roth IRA, many who are disqualified for income resort to the back-door method for funding a Roth IRA.  This works because anyone may open and contribute to a non-deductible traditional IRA, even if you are covered by a qualified retirement plan.
Once the funds are deposited into the nondeductible traditional IRA, they can then be converted to a Roth IRA.  This has the same net income tax effect as contributing directly to a Roth IRA.

The Early Bird Gets the Worm
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Tax free growth and tax free distributions are very enticing especially for those with many years until retirement, so start today. The more time your account has to grow tax free, the better.

Financial Planning 101:  What Should You Do With Your Old 401(k) or 403(b)?

5/9/2017

 
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I often get the question of what to do with an old 401(k) or 403(b) sitting with a former employer. In short, there are only a few circumstances where you would want to leave it be, but in those circumstances it can be extremely advantageous to do so.
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So, when should you leave the money in an old 401(k) or 403(b) rather than roll it over to an IRA?
  • When you’ve left the employer at ages 55- 59 ½
    • In this instance, you can withdraw money without penalty and without having to wait until 59 ½
  • When you have appreciated employer stock
    • This is not a common scenario so I’ll save you some headache and not delve into net unrealized appreciation
  • When your former employer actually offers a decent plan
    • You may THINK your plan is amazing, odds are it’s not
    • Most plans don’t offer a fund menu that can be molded into a truly diversified portfolio
  • Better protection from personal law suits
    • Generally, your assets are safer in a 401(k) or 403(b) plan in this scenario
  • If your plan allows for employee loans and you need to access the money you can do so in a 401(k) or 403(b) without penalty
 
Other than these scenarios, I recommend rolling over your nest egg to an IRA with a reputable fiduciary. Just some of the reasons are:
  • Flexibility
  • Access to a wider range of investment options, not just the 10-15 offered in your employer plan
  • Ability to construct a truly diversified portfolio based on your risk tolerance and return needs
  • Lower fees
    • Some argue that you can get lower fees in a big 401(k) program, but in my experience many plans are more expensive than you may realize when all expenses are considered. Not just mutual funds expenses, but third party administrator fees, third party transfer fees, and other expenses that are embedded in the plan.
  • Professionally managed and re-balanced
    • Most employees must choose their own funds haphazardly and do not re-balance their portfolios consistently

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  • HOME
  • SERVICES
    • Financial Planning
    • Tax Planning
    • Fiduciary Investment Management
    • Small Business Planning >
      • Business Retirement Plan Advisory
  • ABOUT US
    • WHAT IS A FEE ONLY ADVISOR?
    • FREQUENTLY ASKED QUESTIONS
    • OUR TEAM
  • BLOG
    • BLOG
  • SCHEDULE AN INTRO CALL
  • CONTACT A FINANCIAL PLANNER
  • FORM ADV PART 2