Tax Time: Should You Fund a Roth IRA?

Tax time is upon us. During this time of year, many people search for options to reduce their taxes such as contributing to a Traditional IRA. While these contributions can offer an immediate tax break for some households, they may not always be the best long-term option. Many Americans may see a greater long-term benefit from contributing to a Roth IRA. Although Roth IRA contributions do not reduce your taxable income, they do benefit from tax-free growth and tax-free income during retirement. If you’re already contributing to an employer-sponsored plan and would like to maximize your savings, the Roth IRA may be an excellent option.

Unfortunately, the IRS has limitations based on income and for contribution amounts. For those under age 50, contributions are limited to $6,000 for all IRA accounts ($5,500 for tax year 2018). For those over age 50, there is an additional $1,000 catch-up allowed, bringing the maximum up to $7,000 ($6,500 for tax year 2018).

Before choosing to make a contribution, consider the short-term and long-term benefits of a Roth IRA:

Penalty-Free Early Distributions.

Distributions of principal and growth can be taken penalty-free prior to age 59 ½ for higher education costs, qualified home purchases, unreimbursed medical expenses, or specific other expenditures. In addition, the principal, or contributions, can be withdrawn at any age penalty-free and tax-free.

Start at Any Age.

Anyone with earned income can open and fund a Roth IRA. In addition, anyone can fund the account. So, you can fund one for yourself and/or your child or grandchild, as long as they have some form of earned income. Spousal contributions are also allowed. So, you can fund a Roth IRA for a non-working spouse.

Tax-Free Growth.

Any earnings in a Roth IRA grow tax-free.

Tax-Free Income.

Your Roth IRA is protected from future tax increases. Withdrawals from a Roth IRA are tax-free, as long as certain requirements are followed*.

No Required Minimum Distributions (RMDs).

Money can be left in a Roth IRA until inherited by your heirs. Unlike 401(k)s and Traditional IRAs, they are not subject to annual required distributions beginning at age 70 ½. Roth IRAs provide legacy and estate planning advantages that tax-deferred accounts do not.

Improved Tax Diversification.

“Tax-Diversified” refers to having a mix of taxable, tax-deferred, and tax-free accounts. Each type of account offers different kinds of benefits:

  • Taxable accounts, such as bank or brokerage accounts, are typically the most accessible for funds. Money can be withdrawn at any time. Taxes are accessed based on interest, dividends, and realized gains at short or long-term capital gains rates.
  • Tax-deferred accounts, such as 401(ks), 403(b)s, and Traditional IRAs, provide tax breaks up front. Contributions are made with pre-tax money, therefore reducing your overall taxable income. However, the IRS imposes penalties for accessing this money prior to age 59 ½. In addition, withdrawals from these accounts are subject to ordinary income tax rates.
  • Tax-free accounts, such as Roth IRAs, do not offer any up front tax breaks, however the future tax break can be very advantageous. Tax-free income during retirement may help you remain in a lower tax bracket.

If you’re planning to open or fund a Traditional or Roth IRA before April 15 for yourself or someone you love, talk with your financial advisor. He or she can help determine which may best suit your needs.

*In general, a distribution from a Roth IRA is tax-free and penalty-free, as long as the account has been open for five years and the account owner is age 59½, has become disabled, is making a qualified first-time home purchase ($10,000 lifetime limit), or dies. Minimum required distributions do not apply to the original account owner, although they may apply to heirs.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

This is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
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