Here are the ways the contributions and earnings on your retirement investments and savings may be taxed when it’s time to withdraw:
- Later (Tax Deferred), or
- Never (Tax Free)
If you find the idea of tax free income in retirement appealing, a Roth IRA may be right for you.
With a Roth IRA, you can look forward to potential tax free income when you retire or sooner, if you follow a few simple rules. Roth IRA earnings and interest on those contributions are eligible for tax free distributions:
- If the account has been established for at least five years, and
- You have experienced a triggering event such as reaching age 59-½, disability or death.
Unlike other retirement savings programs such as a Simplified Employee Pension (SEP) Plan, Savings Incentive Match Plan for Employees (SIMPLE IRA) or other qualified retirement plans (401(k), 457 or 403(b)), Roth IRAs do not require investors to take mandatory distributions at age 70½. You are able to draw down the account balances needed, on a tax free basis.
Roth IRAs also may be an effective estate-planning tool. Any balances remaining in your Roth IRA are eligible to pass tax free to your beneficiaries.
It is important to note that recently enacted federal tax reform legislation established new income tax brackets beginning in 2018. If you are now in a slightly lower tax bracket than prior years, you should consult with your financial advisor or tax professional to see if a Roth IRA strategy is appropriate for your individual situation.
Here are the three options that will enable you to enjoy tax free earnings on retirement savings via a Roth IRA.
Contribute directly to a Roth IRA
- Eligible investors can contribute up to $5,500, or $6,500 if age 50 and over, directly to a Roth IRA. 2017 Roth IRA contributions may still be made through April 17, 2017.
- Investors who do not meet the income eligibility requirements to contribute directly to a Roth IRA must first contribute to a non-deductible IRA (taxes have already been paid) then have those contributions converted into a Roth IRA.
Rollover and Conversion
- Contributions in other tax deferred retirement accounts such as a SIMPLE IRA, SEP IRA or other qualified retirement plans where access to a Roth feature may not be available, can be rolled over and converted into a Roth IRA. Investors in a SIMPLE IRA must have established the account for at least two years and qualified retirement plan clients must have experienced a triggering event.1
As noted above, your Roth IRA must be established for at least five years and you must experience a qualifying event (age 59-½, disability or death) to access potential tax free earnings. If you are considering converting tax deferred savings into a Roth IRA, please consult your financial advisor or tax professional to gain a more complete understanding of how that may affect your specific financial situation.
- ^Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment-related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances. A financial advisor can suggest a retirement savings strategy designed to meet your financial goals, time horizon and risk tolerance.
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