"Thus we can...take some comfort in knowing that if you had to grab your contributions back, that you could."
Hello again, I’m Mike Frontera and welcome to another edition of Retirement Insights!
You know, I think one of the best retirement savings deals in our tax code is the Roth IRA. Even if you already know how a Roth IRA basically works, I’m going to give you 3 features that you may very well not have heard of.
OK, let’s do a quick review. What is a Roth IRA? The Roth IRA is a type of retirement savings account. It was created as a result of the Taxpayer Relief Act of 1997 by a committee headed by Senator William Roth of Delaware.
It works just like a Traditional IRA account that you're already used to.
Both a Traditional and Roth IRA account are ways to save for retirement that comes with certain tax advantages1. But there are a couple key differences between the two. In fact, the tax treatment of a Roth IRA is almost a polar opposite of the traditional IRA.
A Roth IRA does not offer a deduction for contributions, whereas a Traditional is generally fully or partially deductible. Basically, no tax break when your money goes into a Roth.
But, when you take a qualified withdrawal from a Roth, in other words, you have had a Roth IRA for at least 5 years and you’re 59 ½ years old, then your withdrawals are income tax-free. In a traditional IRA, and traditional retirement plans those withdrawals
are generally fully taxable.
Finally, to be able to contribute to a Roth IRA, your income must fall under certain thresholds. And at the end I’ll include a link to the IRS website that goes over what those thresholds are.
Now, a lot of you may have already known these basics and are sitting there twiddling your thumbs. Well OK, now let’s check out some of these lesser known features of the Roth IRA.
First, you always have access to your contributions with no taxes or penalties. At any age. This is huge so I’ll say it again. You always have access to your contributions that you put into the Roth IRA with no taxes or penalties. I’m not talking about the growth on your Roth IRA.
Just your deposits. So, let’s say you’re a 35 year old and you’re saving for retirement. You’ve been putting in $5000 a year for 3 years into your Roth IRA. So you’ve put in $15,000 total. So your account is worth, say $15,700 because you’ve got some market growth in there. If you run into an emergency, you can pull all $15,000 out of your Roth IRA without causing any taxes or tax penalties. Now that $700 of growth would need to stay in the account of course, but the $15,000 could come out. Any age, any time.
Thus, we can get into the habit of putting more away for retirement by putting into a Roth, and take some comfort in knowing that if you had to grab your
contributions back, that you could.
Pretty neat huh?
Second item – remember I said that Roth IRA contributions are not tax-deductible? Well that’s still true. However, you may actually be able to claim a tax CREDIT when contributing to a Roth IRA. And by credit I mean a true dollar level off of your tax liability. So how does that happen? That is through a program that the IRS calls the “Retirement Savings Contribution Credit” or just the “Saver’s Credit”. It’s applicable to company retirement plans and IRAs. And that includes the Roth IRA.
To qualify for the credit, you need to have a fairly low adjusted gross income.
So let’s take a look at our income requirements for this credit.
You can see here that if you are a married couple and have an adjusted gross income, or AGI, of between $40,001 and $62,000 you can receive a 10% credit on your Roth IRA contribution. You can do this on up to a $4000 contribution. If your income is lower, the level of your credit is higher. I have had clients with an AGI under $37,000 who can get a 50% credit for making a Roth IRA contribution. Imagine that. You put $4000 into your Roth IRA and get $2000 off your taxes!
It’s important to know that this is what’s called a non-refundable credit.
Meaning, the credit is only valid if you have taxes that can be offset. So if you’re showing $0 income and pay nothing in taxes, you wouldn’t be able to receive any credit.
OK, Third item—
Unlike a Traditional IRA, you are never required to take a dime out of your Roth IRA during your lifetime. For those of us who are fortunate enough to not need all of the money that they have set away for retirement, we can simply let them accumulate over time. Except that, with IRAs and retirement plans, we know that once you reach 70 ½ years old, you have to take money out each year or face stiff tax penalties. Not so with the Roth IRA. You could actually keep letting your Roth IRA build without withdrawals for your and your spouse’s entire lifetimes.
In fact, if you have earned income and you’re age 70 ½ years old or more, you can actually continue to put more money into your Roth IRA. That can allow for a significant tax-free inheritance to your children.
Now, a couple caveats with that one. First, I’m strictly talking about a Roth IRA here. Not to be confused with the Roth 401(k). That which would still be subject to required minimum withdrawals after age 70 ½. Second, once a non-spouse, like a child, inherits a Roth IRA they would in fact be required to take minimum withdrawals each year.
So, there you have it. Three unique features that help make a Roth IRA the wonderful savings vehicle that it is.
Do you have questions for me? Let me know! Give me a call me at (518) 612-1060,
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Once again, thanks for joining me. See you next time!
Income thresholds for Roth IRA link