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Roth IRA Planning

| April 20, 2017

As a follow-up to a previous discussion about IRAs, we’ll take a deeper dive into the details of the ROTH IRA.  The ROTH IRA may be a good option for those in a lower marginal tax bracket, or those looking to diversify their tax-favored investments once they’ve fully funded their pre-tax Employer Sponsored Plans or even in combination with their pre-tax Employer Sponsored Plans.

Things to consider when funding a ROTH IRA are your time horizon, current tax bracket, future anticipated tax bracket, and long-term legacy planning goals.  The ROTH IRA can be a very effective long-term planning tool because it provides tax free growth, qualified tax-free distributions, and is not subject to Required Minimum  Distributions  to the  owner.  Roth  IRAs also pass down to your beneficiaries tax-free. 

Unlike the Traditional IRA, contributions to the ROTH IRA can be taken out tax and penalty free at any time as well.  This flexibility with the ROTH allows investors to not only save for retirement but also gives them a cushion for penalty free distributions of basis should they need the money for emergencies.

While there are income limits to contribute directly to a ROTH IRA, taxpayers may still be able to fund a ROTH IRA though a “Backdoor ROTH” strategy which is accomplished by a ROTH Conversion.  However, the “Backdoor ROTH” carries its own rules, so it is important to consult your tax or financial advisor before doing so.