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By Jay Gershman, Retirement Visions LLC, West Hartford
If you’re not aware of the best invention since the light bulb, you are probably in the dark.
I am talking about ROTH IRAs, a special retirement account that allows you to save tax-free for retirement. Seeing that income taxes seem so central to our discussion at this time of year, wouldn’t it be great to have a vehicle that allows you to:
- Invest after tax dollars
- Take out what you invested if you need it, tax-free
- Pass it to your children if you die, tax-free?
How about if I told you that you could use it to save for college, contribute between $6,000 and $7,000 per year per parent, and have the accounts considered retirement accounts when applying for financial aid. Imagine investing $1,000 in Amazon stock in a ROTH IRA to see it grow to $100,000 and owe no tax if you sold it. If I still have your attention, let’s get into the nuts and bolts.
First, who is eligible?
Single filers who earn less than $122,000 per year (contributions phase out between $122,000 and $137,000) are perfect candidates. Those filing jointly must earn less than $193,000 and no more than $203,000.
How much cash can you contribute? If you are under 50, you can contribute $6,000. If you’re over 50, you can contribute $7,000. If you earn more than the limits, are you out of luck? Not necessarily. A strategy commonly referred to as the backdoor ROTH IRA allows someone with no other traditional IRA accounts to contribute to an after-tax traditional IRA and then convert it to a ROTH IRA. If it sounds complicated, it is, but if you want to save tax-free, it is worth the effort to learn more.
Here is what makes me crazy. I meet prospective clients for an initial fact finder. They qualify to contribute to ROTH IRAs. Their tax return shows that they are paying capital gains, dividends, and interest on taxable investments and bank accounts. I ask them a simple question. “Why aren’t these accounts inside a ROTH IRA?” Their response is usually “I don’t know what a ROTH IRA is” or “The money isn’t for retirement” or “I don’t want to tie it up”.
I then explain that, technically, ROTH IRAs are retirement vehicles but they are liquid with penalties only on the gains. So if you plan to take out only what you put in before age 59½, you won’t pay anything! Problem solved.
To start learning more about ROTH IRA’s, talk to your accountant and review your cash and investments to see if you have any opportunities to save on taxes. Talk to your advisor about the pros and cons of using ROTH IRAs to save for college versus 529 plans.
Jay Gershman is the Owner and Founder of Retirement Visions LLC, a West Hartford-based financial planning firm that focuses on comprehensive life planning and financial management. For more information, visit www.allset2retire.com. Information and advice are for guidance only and opinions expressed belong solely to the author. Securities offered through Securities Service Network, LLC. Member FINRA/SIPC. Fee based services are offered through SSN Advisory, Inc., a registered investment advisor.
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