The Less Taxing Roth IRA
“A Roth IRA is an Individual Retirement Account that provides tax-free growth. As a result, it’s the simplest – and potentially the most effective – sheltered account imaginable.” –Moneychimp.com
Considering the Roth IRA is a way to totally avoid paying taxes on your retirement savings, it’s puzzling why more of us don’t embrace it. Here’s some startling statistics from Fidelity: only 19% of working Americans hold Roth IRAs, even though 90% qualify for them. And according to the most recent numbers from the Federal Reserve Survey of Consumer Finances, only 4% of all IRA assets are held in Roth IRAs.
When it comes to traditional IRAs, you get immediate tax relief in the form of a deduction. But when you take money out of an IRA, it is subject to regular income taxes. On the contrary, unlike a Traditional IRA, you won’t owe any taxes or penalties on earnings you withdraw from a Roth IRA. But there are a few caveats. At The Wheeler Group, we clearly explain that, “as long as your Roth IRA annuity has been established for at least 5 years and you are over age 59 1/2.” For more detailed tax related information visit the, “IRA Online Resource Guide – Information About Roth IRAs”, put out by the IRS.
The way I see it, while the short-term tax advantages for tax-deductible contributions to your IRA are not available with the Roth, the long term tax-free compounding of a Roth IRA is almost impossible to beat. Think about it: your retirement plan can continue to compound and all future withdrawals under certain guidelines are tax-free. Over time, that can add up to a significant advantage over the traditional IRA.
Another clear advantage to a Roth is that it is easier to understand. Especially when it comes to RMDs (Required Minimum Distributions). Simply put, there’s no RMDs with a Roth. With a traditional IRA, you face stiff penalties if you don’t start taking RMDs by 70 1/2 years old. And for anyone who has reviewed the RMD tables, the algebra of it all can be perplexing.
And since you can accumulate huge amounts of money in Roth IRAs without RMD worries, they make valuable vehicles for estate planning. You also have the opportunity to pass on the Roth to your heirs without them inheriting traditional income tax liabilities. You can give your Roth IRA to your heirs and they will never have to pay taxes on monies they withdraw. Although they will have to make RMDs according to strict IRS timetables, they can stretch out drawdowns over their lifetimes, which makes Roth IRAs an awesome asset to leave grandkids. As a legacy planning tool, The Roth Legacy Trust is a well thought through concept on using the Roth for estate planning purposes.
As one part of your portfolio, the Roth IRA has many advantages. Whether you choose to simply watch your money accumulate tax-free for your golden years, or pass your assets onto your heirs, a Roth IRA can be less taxing all the way around. Here’s to your continued success!