To Roth, or not to Roth?

To Roth, or not to Roth? That is the question. And an extremely common one from new retirement savers at that. As with most planning questions the answer to whether someone should have a Roth IRA depends on an individual’s set of unique circumstances and which IRS stable they’re herded into that decides what they’re allowed to do and when.

I think we get this question so often, because pretty much everyone has heard of a Roth IRA through some commercial or bank or something and all they say is look into one. To help with that endeavor, here are some straight forward facts about Roth IRA’s that may help you or someone you know start to answer that question yourself and decide if a dive into the nitty gritty with an advisor is warranted.

  1. You can withdraw whatever you contributed to your Roth IRA at any time assuming your account value hasn’t declined.

  2. You cannot deduct Roth contributions from your income. Contributions are made with normal old after tax money you may find in your bank account or under couch cushions.

  3. Like any other IRA, your money grows tax deferred meaning you don’t pay taxes on any dividends or gains that you leave in the account.

  4. You are not forced to take hated required distributions from your Roth IRA when you turn 70 1/2 and neither are your heirs when they inherit it. That can be a big deal!

  5. If you take earnings from a Roth IRA that has been open less than five years, for any reason, you will pay taxes on those earnings regardless of age.

  6. If you are under 59 1/2 years old, you could be subject to an additional early withdrawal penalty on earnings unless you meet one of the following exceptions:

    • You’re using the money for a first time home purchase (max $10,000)

    • You’re using the money to pay for qualified educational expenses

    • You become disabled

    • You’re paying medical expenses if you’re unemployed

    • You follow a periodic payment tax code provision.

What you actually care about: When can I get at my money and not pay any taxes or penalties?

  • You can take out whatever you put in any time.

  • When you meet an early withdrawal exception and the account has been open for 5 years.

  • When you’re over 59 1/2 and the account has been open for 5 years.

End of the story is Roth’s give you the ability to grow your retirement savings tax deferred, and take your money back out in a more flexible manner than with most other plans.

One snag we hit with using these is rule number 2. Other retirement plans allow you to contribute pre-tax or to deduct your contributions from your income for that year so you realize those tax savings right now rather than in retirement. Which way is better? It depends of course, and often brings up the bird in the hand versus two in the bush metaphor. Another hang up is that IRS doesn’t let everyone contribute to Roth IRA’s.

So there you have it and, should you choose the path of the nitty gritty, you know where to find us.

All the best,

Wesley R. Nicholson, Mike Allen and Aaron Everdyke

Securities Offered Through Commonwealth Financial Network, Member, FINRA, SIPC, a Registered Investment Advisor. Advisory Services offered through Laurel Financial Group are separate and unrelated to Commonwealth. Laurel Financial Group is a Registered Investment Advisor

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