If you are currently involved with your company’s retirement plan and have noticed a new addition of a Roth 401(k), you are not alone. The Roth IRA, or Roth 401(k), is picking up a lot of traction, rightfully so. If you have never heard of a Roth IRA before, don't worry, I will outline what a Roth IRA is and the benefits of contributing to one.
What is a Roth IRA?
Roth IRAs are a terrific way to save and invest for retirement. You make after-tax contributions and earnings grow tax-free. Unlike Traditional IRAs, withdrawals are tax-free, as long as you meet certain requirements. Also, the government does not require you to start drawing down your Roth IRA at age 70½ like they require for Traditional IRAs (also known as RMD). This is a great benefit that often gets overlooked. Tax free AND you don’t HAVE to take a withdrawal at a certain age, two benefits not often heard in investing.
Who can contribute to a Roth IRA?
You can contribute up to $5,500 in a Roth IRA this year or $6,500 if you’re 50 or older. However, not everyone can contribute to a Roth IRA. Individuals making over $129,000 this year and married couples who make over $191,000 and file taxes jointly are ineligible. Also, having earned income for the year is a must in order to make a contribution for the year.
What’s a Roth IRA conversion?
Even though your income has to fall within a certain range to make a Roth IRA contribution, you still have the ability to do a, ‘Roth IRA conversion.’ In the past to be able to convert from a Traditional IRA to a Roth IRA your income needed to be under $100,000. The IRS rules have changed and there is no longer an income cap in place. With the cap removed high income earners can now convert part or all of their Traditional IRA to a Roth IRA as long as they pay the appropriate tax on the conversion. Income tax on the amount converted is due that year. The benefit of doing a Roth IRA conversion varies by individual. In order to make an educated decision, make sure you review the pros and cons with your investment advisor.
- Brian Valenti
Generation Capital Management (GCM) is an independent, SEC-Registered Investment Advisor located in Rochester, NY. Since 2003, we have provided value to our clients through a premium level of investment service and an unbiased, effective investment process. If you have questions or need additional information, please feel free to contact us at: (585) 232 – 8560.