Time to get ROTHified!

Money Matters

One of the rare gifts we have in the tax code is the ROTH IRA. However, it is likely you and your family are not using ROTHs to the fullest advantage.

What’s so great about a ROTH IRA or ROTH 401(k)? Mainly that ROTH money grows tax-free, and in many cases, can be taken out tax-free. Another advantage that retirees enjoy is that the IRS does not require Required Minimum Distributions (RMDs) at age 70½ from ROTH IRAs.

Many employers now offer a 401(k) ROTH option in addition to the widely used pretax-traditional contribution option. The biggest benefit to a ROTH 401(k) is that there is no income limit on deferrals into ROTH 401(k)s unlike ROTH IRAs, which are subject to an income ceiling for singles of $122,000 in 2019 ($124,000 in 2020) and for married filing jointly $193,000 in 2019 ($196,000 in 2020).

Other ROTH perks include:

  1. Tax-free in and tax-free out. Take out Roth IRA contributions at any time, for any reason, at any age, without having to pay taxes or penalties.
  2. Enjoy penalty-free withdrawals to pay for higher education expenses for you, a spouse, children, grandchildren and great-grandchildren.
  3. Another penalty-exemption is for first-time homebuyers as long as you (and your spouse, if married) haven’t owned a home during the previous two years.
  4. You must use the money to buy, build or rebuild a home. Note, there’s a $10,000 lifetime cap, so it’s a one-time deal for most. According to IRS rules, you can also use the money to help out a child, grandchild or parent who meets the first-time homebuyer definition.

What are “qualified distributions”? They are tax-free and penalty-free withdrawals. The IRS considers a distribution “qualified” when an account meets the five-year rule and the withdrawal is:

  • Made on or after age 59½
  • Taken due to your disability
  • Made by a beneficiary after your death
  • Used to buy, build or rebuild your first home

Avoid common missteps on distributions that can become “non-qualified distributions,” which are subject to taxes on earnings plus a 10 percent penalty. You may not have to pay the 10 percent penalty if one of these exceptions applies:

  • The distributions are part of a series of substantially equal payments (minimum five years or until you reach age 59 ½, whichever is longer).
  • You have unreimbursed medical expenses exceeding 10 percent of your Adjusted Gross Income (AGI).
  • You are paying medical insurance premiums after losing your job.
  • The distributions are not more than your qualified higher education expenses (for you or eligible family members).

If at least five years have passed since your ROTH was opened and contributed to, the withdrawals count as qualified distributions. That’s true regardless of your age when you opened the account. You can make penalty-free withdrawals at age 59 ½, for instance, but if you were 57 when you made your first contribution, you would need to wait until age 62 to withdraw earnings.

Get ROTH-ified now, and start rocking your tax-free investment growth well before you plan to retire.

About Jayne Di Vincenzo 10 Articles
Jayne Di Vincenzo, AIF®, CEP®, has more than 20 years of experience as a financial advisor and wealth consultant. She holds her registrations and licenses including the 24 General Securities Principal, 53 Municipal Principal, Series 7, 63, 65, 31 with Cambridge Investment Research, Inc. Jayne owns Family CFO Services and Fiduciary EDGE Advisors LLC. Reach Jayne at 757-236-5505 or Jayne@FamilyCFOSvs.com.

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