I recall a wise man who was short on words, but long on wisdom saying, “Roth IRA – Maximize Retirement Live Securely.” Well, that pretty much sums it up, doesn’t it.
If you want to get the most out of your retirement years, then you should start by opening a Roth IRA account, contribute the maximum amount -which in 2016 is $5,500, if you are under the age of 50, and $6,500 if you are age 50 and older. Do this every year consistently until you retire.
Now, the last part of the sage advice offered by my friend can, unfortunately, not be guaranteed. Life is unpredictable. Therefore, “living securely” is subject to many conditions such as, health, expenses, debt, including external events that we may not have any control over.
However, I believe it is safe to say that a person is much better off if he or she begins saving in a Roth IRA a lot earlier in life, rather than later; and even more so if the maximum yearly contribution is made. At least, that was the intent of the man who is credited with creating the Roth IRA, the late United States Senator, William V. Roth, Jr. We all know that it’s never too early to start saving for retirement. Therefore, let’s focus on why it is important to use a Roth IRA to “maximize retirement and live securely.”
Legend has it that Albert Einstein once called compound interest the “Eighth Wonder of the World,” and while no one has been able to confirm this quote, the sentiment it conveys is quite real. Early savers will benefit most from compound interest and have more to draw upon when they retire; unlike a Traditional IRA, which offers tax deferred growth, including a range of “phase outs” in order to qualify for a contribution based deduction that is determined by your Adjusted Gross Income (AGI).
A Phase Out?
Yes, a phase out. For example, if your tax filing status is “Single”, then in 2016 your earned income must be less than $116,000 in order to contribute to a Roth IRA. If your income exceeds this threshold the amount of your allowable contribution will begin to “phase out.” If your income exceeds $131,000, then contributing to a Roth IRA is not allowed. Similarly, the phase out range for a married couple that files jointly is $183,000 – $193,000, whereas for married couples filing separately, the phase out range is $0 – 10,000.
Now you can see why it is important to begin contributing to a Roth IRA when you are younger, because younger workers tend to earn less, possibly allowing them to contribute the maximum amount of $5,500 for a number of years until their income either exceeds $116,000 and the phase out begins, or before their AGI is more than $131,000 at which point they are no longer eligible to contribute to a Roth IRA.
BEWARE! There are some “gotchas” with the Roth IRA…
For example, a contribution to Roth IRAs that are in excess of the allowable amount are subject to a six (6) percent penalty. In addition, contributions must be made by the tax-filing deadline for the year, not including extensions. Now, let’s rehearse what you have learned…by taking a little quiz. Yeah, I know, you thought that your pop quiz taking days were over, right? WRONG! I just want to make sure that you know that your time reading my blog post was well spent. Ready? Let’s go!
An unmarried person can make a contribution to an IRA if he/she doesn’t have earned income. True or False.
For a Single tax filer, the contribution “phase out” range begins at $117,000 and ends at $141,000. True or False.
The penalty for making an excess contribution to a Roth IRA is 4%. True or False.
Due to the benefit of tax deferred growth of contributions made to a Roth IRA, it is best to begin contributing to a Roth IRA after your income exceeds $41,500 and if you intend to file a petition to the Internal Revenue Service (IRS) to request tax free withdrawals. True or False.
The Roth IRA was named after its creator, U.S. Senator William V. Roth, Jr. True or False.
What About Contributing to a 401(K) Plan?
Many people rely on 401(k)s for their primary retirement savings vehicles, especially if they receive matching funds from their employers. But for those who do not have access to this benefit, there are still plenty of options available. For instance, a growing number of younger workers are discovering the benefits of Roth IRAs. Unlike 401(k)s, Roth IRAs can only be funded with post-tax dollars, which places a stricter limit on what you can contribute with each paycheck. However, there are many benefits to a Roth IRA. You’re allowed to withdraw original contributions at any time without penalty, which is something that cannot be done with a 401(k) or a pretax IRA. In addition, once you turn 59 all withdrawals are tax free. This is particularly useful for people who suspect that their incomes and tax rates will rise as they get older.
Even those who already have a 401(k) may want to consider a Roth IRA as well, to increase the amount of money they can put away each month. But there are also options for those who have little to no savings whatsoever. Last year, the Obama Administration announced the rollout of a new program called MyRA — an offshoot of existing tax laws that allow workers to invest in Treasury bills at no cost, even if they can only make small monthly contributions.
Every little bit of savings helps, especially if savers are receiving financial and retirement planning assistance. At Wealthcare Financial Group, our team of financial, tax and investment specialists can help you develop the best path forward for your savings.
How do you think you scored on our little pop quiz?
Take a moment to see if you will be able to apply the sage advice of my wise friend, a man of few words: “Roth IRA – Maximize Retirement Live Securely.”
An unmarried person can make a contribution to an IRA if he/she doesn’t have earned income.
For a Single tax filer, the contribution “phase out” range begins at $117,000 and ends at $141,000.
The penalty for making an excess contribution to a Roth IRA is 4%.
Due to the benefit of tax deferred growth of contributions made to a Roth IRA, it is best to begin contributing to a Roth IRA after your income exceeds $41,500 and if you intend to file a petition to the Internal Revenue Service (IRS) to request tax free withdrawals.
The Roth IRA was named after its creator, U.S. Senator William V. Roth, Jr. in 1982. True or
I may not be a man of few words. In fact, I am anything but a man of few words. Heck, my Bachelor’s Degree is in Legal Communications and I minored in Philosophy. Therefore, being short on words will probably never be my strong suit. However, in this regard I am happy to channel my inner “sage” by reiterating the wisdom of a man whose words best sums up for many Americans how to plan for a secure retirement.
Roth IRA – Maximize Retirement Live Securely!!!
- Financial and Retirement Planning
- Portfolio Management and Investment Allocation (401K, IRA, Brokerage)
- Estate Planning
- Retirement Income Planning
- Insurance and Annuities