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Blakely Financial ROTH IRA

All About ROTH IRAs

Presented by STEPHEN LAFRANCE, CFP®, MBA

As you work and plan for your financial future, a possible strategy for savings is a Roth IRA. A Roth IRA is a retirement savings account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you have already paid taxes on the money you put into it. In return for the no up-front tax break, your money grows tax-free, and when you do withdraw it for retirement, you pay no taxes. Roth IRAs are best when you think your taxes will be higher in retirement than they are right now.

The first requirement is that you must have taxable compensation. If your taxable compensation is at least $6,000 in 2020 (unchanged from 2019), you may be able to contribute the total amount. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your MAGI (Modified Adjusted Gross Income) and your income tax filing status. As a result, your allowable contribution may be less than the maximum possible or nothing at all.

Roth IRAs — Tax Year 2020
Filing status Contribution is limited if MAGI between: No contribution if MAGI is over:
Single/Head of household $124,000 – $139,000 $139,000
Married joint $196,000 – $206,000 $206,000
Married separate $0 – $10,000 $10,000

Your contributions to a Roth IRA are not tax-deductible. As a result, you can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely free from federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

  • You have reached age 59½ by the time of the withdrawal
  • The withdrawal is made because of a disability
  • The withdrawal is made to pay first-time homebuyer expenses ($10,000 lifetime limit from all IRAs)
  • Your beneficiary or estate makes the withdrawal after your death.

Qualified distributions will also avoid the 10% early withdrawal penalty. This ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. And remember, even nonqualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions you have made.

In addition, it does not matter if you are covered by an employer’s retirement plan, such as a 403(b) or 401(k). If you do not exceed the IRS income limits, you can still contribute the maximum annual amount to a Roth IRA, $6,000, or if you are age 50 or older, $7,000.

Another advantage of the Roth IRA is that there are no required distributions after age 70½ or during your life. As a result, you can put off taking distributions until you need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution, and their withdrawals will be tax-free.

As always the case with planning for retirement, we suggest meeting with your trusted financial advisor and your tax preparer to ensure that you are getting all the benefits available from each savings vehicle.

 

Prepared by Broadridge Advisor Solutions

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

STEPHEN LAFRANCE, CFP®,MBA is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.