Four reasons you need a Roth IRA

In our last post we talked about the importance of saving enough in your employer sponsored retirement plan and cautioned that even if you were contributing your full match, it might not be enough.

The vast majority of us will need additional savings and a good place to accumulate that is in a Roth IRA.  A Roth IRA is an excellent savings vehicle because, unlike the traditional IRA, the money in a Roth grows tax free and the withdrawals are not taxed either.  This makes it preferable to the traditional IRA for retirement savings, but there are other advantages to a Roth IRA as well.

Here are four reasons you should save money in a Roth IRA:

The Roth IRA gives much more freedom of choice.  In an effort to keep the plan simple, many 401(k) and 403(b) plans do not include investment choices that would help diversify your portfolio, nor do they offer the most cost-effective investments available.  Most employer plans limit you to investing in only a handful of mutual funds.  While mutual funds are good investment vehicles, ETFs (Exchange Traded Funds) have emerged as a favorable alternative to mutual funds because of their lower cost and flexibility.  In a portfolio that is large enough to accommodate them, individual stock holdings are also a good choice for low expense and diversification.

The money in a Roth IRA that is not inherited is not subject to a Required Minimum Distribution (RMD).  Roth IRAs are funded with after-tax money and the withdrawals from a Roth are not taxed on the way out. Because of this, the IRS has no need to force withdrawals from a Roth because there are no taxes to collect.  Not being subject to an RMD makes the Roth IRA a more flexible option for retirement income.  You can also continue to contribute to your Roth after the RMD mandatory age of 70½ if you are still earning wages or are self-employed.  At 70½, not only must you begin to take withdrawals from a traditional IRA, you can’t make any contributions to the IRA either. Inherited Roths follow their own set of rules, which depend on whether you are the spouse of the decedent or you are any other beneficiary.  If you have inherited a Roth IRA, you should talk to an experienced investment advisor to understand your rights and responsibilities.

Roth IRAs can be good for estate planning.  You can pass your account funds on after you die, and heirs will receive this money in periodic or lump-sum distributions in the same tax-free way you would have.  Another advantage of the Roth for estate planning is that Roth money can be moved quickly and easily to a trust.  This is important because putting assets in a trust can protect it from nursing home “asset forfeiture” should you need long term care and not have the funds to pay for it.  Two additional points to keep in mind about using a trust for this kind of estate planning are:

  1. Long term care insurance should be included in any estate plan where substantial assets, like a house or retirement account, are at stake.
  2. Current law allows the state to “look back” five years to where assets were held in order to recoup payments made by the state for long term care.

Access to your contributions in case of an emergency.  Since the money contributed to a Roth has already been taxed, you likely will be allowed to take it out any time.  This does not apply to any earnings you have made in the account from interest, dividends or price appreciation.  You must be over the age of 59½ and have waited five years from January of the year you made your first Roth contribution in order to take earnings out of the Roth tax and penalty free. Of course, we don’t recommend dipping into your retirement savings early for any frivolous reason. But in case of emergency, you’ll be glad to know your money is accessible.

To learn more strategies designed to make sure your retirement funds last your whole life, please call or email the office today. Our education-focused advisors will work with you to create effective retirement accounts and to make sure you understand exactly how each element works for you.