A friend of ours likes to say, “With the right tools, you can build anything.”
But not every project starts inside a fully stocked workshop. If you had to start somewhere, which tool is versatile enough to add to almost any toolbelt?
We may work in financial services, but the metaphor applies! Let us introduce you to the “Swiss Army Knife of finance”: the Roth IRA.
Why do we love this tool? Like many other retirement vehicles, Roth accounts can generally be built by anyone with earned income (though not too much: there’s an upper limit). But here’s what sets a Roth apart from other retirement accounts:
- Roth earnings grow tax-free. You pay your ordinary income tax rate on Roth contributions at the time they’re made. You will never pay tax on the earnings growth inside a Roth. Why does this matter?
- When used as designed, once your working years are over, you can make Roth withdrawals to supplement your retirement income with zero tax obligation.
- If your tax rate may go up in the future—by law or because your highest-earning years are still ahead of you—you can take advantage of your current tax rate by contributing to a Roth now. Existing IRAs may also be converted to Roth, as a so-called “backdoor Roth.” Both methods could help ease a future tax burden by making use of your current rate.
- Roth uses are flexible. Think beyond retirement: your household could use a Roth in the mix when planning ahead for a variety of purposes.
- Withdrawals can be made at any time for certain qualified expenses—money for a first-time home purchase or a birth or adoption, just to name a few.
- Withdrawals can be made at any time for certain qualified expenses—money for a first-time home purchase or a birth or adoption, just to name a few.
- Roth contributions may be withdrawn after five years, for any reason—no tax, no penalty, and your age doesn’t matter. The Roth deposits you’ve made can be taken out tax- and penalty-free once this so-called “5-year rule” is met.
- One use case: A Roth could be established while the kiddos are in middle school, and contributions could be withdrawn when it’s time to help pay for college, an apprenticeship, or any other adventure after high school graduation.
- One use case: A Roth could be established while the kiddos are in middle school, and contributions could be withdrawn when it’s time to help pay for college, an apprenticeship, or any other adventure after high school graduation.
- Roth accounts do not have RMDs. Unlike traditional IRAs, Roth accounts do not have “required minimum distributions” (RMDs). This feature brings some flexibility to your retirement planning: your Roth account has a chance to continue to grow for as long as you choose. No IRS-mandated withdrawals, at any age.
- Could a Roth work for you? A Roth may not be right for everyone, and even the best Swiss Army knife is still only one tool in the toolbelt. We’re to help—happy to chat. The talk is free, any time.
Happy crafting! Hope you get to build something beautiful.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Leibman Financial Services, Inc., a registered investment advisor. Leibman Financial Services, Inc. and 228Main.com are separate entities from LPL Financial.
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