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Roth IRAs: What You May Want to Know For the 2018 Tax Season

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Written By Josh Espinosa CFP®,CIMA®

Tax season is upon us. While it may not be the most enjoyable time for many, it does provide a great opportunity to take a look at your retirement savings contributions to ensure that they are in line with your future financial goals. Some may find it beneficial to contribute to a Roth IRA to assist in meeting your goals. April 15, 2019, is the cutoff date for your 2018 tax filling and IRA contributions (you can also begin making contributions for 2019 as well). Now is an opportune time to take a look at the financial benefits and current limits of Roth IRA contributions.

The benefits of a Roth IRA could include:

1.    Greater financial security in retirement and less tax-stress when withdrawing funds in the future. Unlike a Traditional IRA, which are taxed as you make withdrawals, Roth IRA contributions come from after-tax income. While you may have paid those taxes upfront, you typically won’t have to worry how possible future tax increases may limit your retirement income decisions. And since that money has already been taxed, you’re not required to report withdrawals on your tax return.

2.    Freedom and liquidity. If you withdraw from a traditional IRA before reaching 59 ½ you will usually have to pay a penalty. In most cases, Roth contributions can be withdrawn penalty-free and tax-free at any point, at any age. If you are over 59 ½ and have had a Roth account for at least 5 years, you can withdraw both your contributions and earnings with no tax or penalty. There are also possible exemptions for those under 59 ½, such as a first time home purchase.

3.    No required minimum distribution (RMD) in most cases. Most retirement accounts have a “use by” date requiring account holders to withdraw a minimum amount each year beginning at age 70 1/2. Since Roth accounts are funded with after-tax dollars, the IRS has no stake in the game (so to speak). This can allow you to continue to save, grow, and spend your money while in retirement without pushing yourself into a higher tax bracket. There are some exceptions to the “no RMD” rule, such as a beneficiary(s) inheriting the account; in most cases, it is a great tool for tax-free income in retirement.

While Roth IRAs can be incredibly beneficial for those wanting to have a tax-free withdrawals, there are also some limits to take into consideration.

With a Roth IRA, your contributions won’t help lower your taxable income for the year in which you contribute. In some cases, contributions to a Traditional IRA can help to lower your adjusted gross income. This can allow certain individuals to qualify for tax incentives, such as the Child Tax Credit or American Opportunity Credit.

The contribution amount is also limited as well for both Traditional and Roth IRA’s. For 2018, the maximum contribution you can make into a Roth IRA is $5,500 a year (this was increased to $6,000 for 2019). For those over 50, you can add an additional $1,000. For some, this contribution is not enough as a stand-alone retirement plan, but it can be maintained in conjunction with an employer-sponsored 401(k), which offers a higher yearly contribution limit.

There are also limits in place which may disqualify certain individuals from being able to contribute based on their income levels. Traditional IRAs do not have income limits (although they do have income-based tax deduction limits), but Roth IRA’s have maximum income limits for partial and full contributions.  Below are the current income limits for 2018 and 2019.

2018 Roth IRA Income Limits

2019 Roth IRA Income Limits

If your modified Adjusted Gross Income (AGI) does exceed the limit for contributions, some workarounds do exist. Utilizing a Roth conversion (otherwise known as a “backdoor” Roth IRA), where you convert from a Traditional to a Roth IRA, you can take advantage of the future tax-free benefits of a Roth account. There are rules which govern how the conversion is accomplished, and transferred funds are subject to regular income taxes for that year, but it is an option that high-earners could utilize. The processes can be a bit difficult for those who are not familiar, so it can be helpful to consult with your CPA or financial professional for assistance.

There are many factors to consider when deciding if and how much to contribute to a Roth IRA, such as age, current taxable income, financial flexibility, and where your tax rate may fall in the future. Retirement accounts are not typically a “one size fits all”, but a good retirement plan can ensure that your future financial security is preserved and enhanced. As we approach the upcoming tax season deadline, it can help to meet with your advisor to look over your current retirement contributions and discuss any changes in your tax status.

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

Sources:

Roth IRA Information

https://www.irs.gov/publications/p590a

https://www.irs.gov/publications/p590b

https://www.irs.gov/retirement-plans/top-ten-differences-between-a-roth-ira-and-a-designated-roth-account

https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras

https://www.irs.gov/retirement-plans/retirement-plans-faqs-relating-to-waivers-of-the-60-day-rollover-requirement

https://www.irs.gov/publications/p554

https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/roth_ira/withdrawal_rules

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