Choosing a Roth IRA

There are many vehicles to choose from as you travel the road to retirement. One of the more advantageous means you may utilize to build a nest egg is the Roth IRA.

A Roth IRA is an Individual Retirement Account that allows you to contribute after-tax dollars into a savings or brokerage account.

The after-tax dollars won’t allow you to claim a tax deduction as you might on a traditional IRA, but withdrawals are not subjected to federal income taxes when withdrawn after 59 ½ years of age, as long as the account has been opened for at least five years.

Like a traditional IRA, interest, dividends, and capital gains are sheltered from taxes inside the Roth.

Tax time

Subject to income limits, you may contribute up to $6,000 per year if you are under 50 and $7,000 per year if you are 50 or over.

We are past the tax deadline for 2019, but it’s not too early to begin thinking about 2020. However, let’s be aware of income limits.

For someone who is single (or head of household), you are eligible to make the full contribution to a Roth if your modified adjusted gross income (MAGI) is under $124,000 for the tax year 2020. The limit gradually declines between $124,000-$139,000. Above $139,000, Roth contributions are not allowed.

If you are married and filing separately, the rules become a little more complex so let’s talk if you are in this category.

If you are married and file jointly (or qualified widow/er), MAGI must be under $196,000 for the tax year 2020, while the contribution limit is gradually phased out between $196,000-$206,000. Above $206,000, Roth contributions are not allowed.

You may contribute to a Roth and a traditional IRA, but you may not exceed the prescribed annual limits.

In addition to tax-free withdrawals, Roth IRAs are not subjected to required minimum distributions.

Further, under the SECURE Act, an inherited Roth IRA (and a traditional IRA) must be distributed within 10 years if the beneficiary is not your spouse (in most cases).

Unlike a traditional inherited IRA, the distributions are tax free. And beneficiaries may let the Roth account grow tax free until year 10, when the distribution is required.

High-income taxpayers and the backdoor Roth

If you have a healthy six-figure income, hard limits prevent you from contributing directly to a Roth. But income limits don’t exist for converting a traditional IRA into a Roth, which leaves a loophole for high-income taxpayers.

Long story short, you may contribute to a non-deductible traditional IRA, open a Roth IRA, convert the contribution into the Roth IRA, and pay the taxes on any appreciation.

Conceptually, the backdoor Roth strategy is relatively straight-forward if you have no other IRAs. If there are other IRAs in your name, taxes are pro-rated. I’ll avoid getting into the minutiae, but I’d be happy to work the numbers out for you, as that is what I’m here for.

Or, before considering a Roth IRA or a backdoor Roth, you may want to consult with your tax advisor.

I hope you’ve found this review to be helpful and educational.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. I have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.

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