4 Reasons Everyone Should Contribute to a Roth IRA

1) Tax – Free Distributions

If the Roth IRA account is open for at least 5 years and the taxpayers is over age 59 1/2, then all of the distributions from the Roth IRA are tax-free.

 

2) Take Your Contributions Back at Any Time

Unlike a Regular (or Traditional) IRA, contributions to a Roth IRA are not income tax deductible. Because the contribution is not tax deductible, taxpayers can take back their contributions at any time without any income tax. Taxpayers under age 50 can contribute $5,000 per year.  Taxpayers age 50 and older are allowed an additional ‘catch-up’ contribution of an additional $1,000 or total of $6,000.

 

3) No Required Minimum Distribution (“RMD”)

With a Regular or Traditional IRA, taxpayers must begin to take out their RMD by April 1 of the year following the year they turn 70 1/2. With a Roth IRA, there is no requirement for a RMD. This is effective for the taxpayer and surviving spouse.  Non-spousal beneficiaries like children and grandchildren, will have the RMD requirement. If the account met the above qualifications however, there will be no income tax on this RMD. This is what makes the Roth IRA such a wonderful wealth transfer tool.

 

4) Pay the Income Taxes Up Front

As was mentioned above, contributions to a Roth IRA are not income tax deductible.  The benefit to the Roth IRA is on the backend, when distributions are being made. Why would you want to pay income taxes up front. Income tax rates are near all-time lows.  Given the federal deficit it appears that income taxes are headed up.

Who is Eligible to contribute to a Roth IRA?

 

Taxpayers that are under 70, with earned income and income below a specified threshold can contribute.

In 2012 married couples filing a joint return can contribute when their modified adjusted gross income is under $173,000. A partial contribution is allowed with income up to $183,000, and nothing is allowed over this amount. Single filers can contribute when their modified adjusted gross income is under $110,000. A partial contribution is allowed with income up to $125,000, and nothing is allowed over this amount.

ACTION ITEM: Eligible taxpayers should strongly consider funding their Roth IRA.

If you would like assistance to see with why a Roth IRA makes sense to you, please call us at (860) 646-2465.

 

Thomas F. Scanlon, CPA, CFP®

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

Tagged with: , , , , , , , , , , , , ,
2 comments on “4 Reasons Everyone Should Contribute to a Roth IRA
  1. Dan says:

    Tom,

    Great article & great ideas but if you don’t mind I would like to point one reason I think you may have missed.

    Distributions from Roth IRA/401ks are not considered income in the eyes of Medicare.

    Most financial professionals have no real clear understanding about the impact of earning too much income in retirement when Medicare comes into play & the Roths become a major help in the distribution phase.