What is a Roth IRA and Do I Need One?

Whether you are rolling over an existing 401(k) or looking to expand your investment portfolio with a new retirement account, a Roth IRA is an option worth exploring.  A Roth IRA offers many significant benefits; however, certain eligibility requirements must be met before an investor is able to contribute.


What is a Roth IRA?

A Roth IRA is a retirement savings account funded with after-tax dollars. Similar to a 401(k), assets (stocks, bonds, ETF’s, etc.) are allocated within your investment portfolio based on your risk tolerance levels and investment goals.

Because you have already paid taxes on the dollars going into your Roth, your money is able to grow tax-free; and when you make a withdrawal in your retirement years, you pay no taxes, even on the investment earnings.

Tax laws dictate annual contribution limits.  In 2019, an individual can make a contribution of up to $6,000 per year, or $7,000 per year if age 50 or older.  Also, you have 15 months, from January 1, 2019 until the tax deadline of the following year (April 25, 2020), to make a 2019 contribution.


How is it Different than a Traditional IRA?

A financial advisor can help you determine if you should pursue a Traditional or Roth IRA account.  Ultimately, the decision will depend on your current tax bracket, your expected tax bracket at retirement as well as your personal goals.  The following chart breaks down some of the biggest differences between a Traditional and Roth IRA.

 

Traditional

Roth

What are contributions made with?

Pre-tax dollars

After-tax dollars

When are taxes paid?

When funds are withdrawn in retirement years

Before funds are deposited into account

Is there a required minimum distribution?

Yes, beginning at age 70 ½

No RMD

Is there an age limit for making contributions?

Age 70 ½

No age limit

Am I able to make a withdrawal at any time?

Yes, but will be required to pay income taxes and a 10% penalty fee if before age 59 ½

Can withdraw direct contributions (but not investment earnings) at any time, without taxes or penalty fees

 

What are the Benefits?

A Roth IRA offers many unique benefits to investors.  For instance, you can open a Roth IRA account and begin investing at any age, provided that you meet eligibility requirements.

Perhaps the most significant benefit is that your investments can grow tax-free as contributions are made with after-tax dollars.  Assuming you have had the account for at least five years, there are no taxes or penalties on any money, including investment earnings, withdrawn after age 59 ½.  In addition, you have complete access to your direct contributions, and can withdraw them at any time, also without taxes or fees. 

Another substantial benefit is that you are not required to make a distribution once you reach a specific age—there is no required minimum distribution (RMD) as there is with other retirement accounts.  Also, there is no contribution age limit—as long as you are earning an income that is eligible, you can contribute.


Am I Eligible?

In general, if you are bringing in an income (salary, hourly wages, etc.), you are able to contribute to a Roth IRA.   However, the amount that you can contribute is determined by your tax filing status and income range.  A non-working spouse may also be eligible to open a separate Roth IRA based on the income of the working spouse, but the couple must be married and file taxes jointly.

The 2019 Contribution Limits are:

Tax Filing Status

Modified Adjusted Gross Income (AGI)

Contribution Amount

Married Filing Jointly, Qualifying Widow(er)

Less than $193,000

$6,000*

$193,000 to $202,999

Reduced contribution**

$203,000 or more

Ineligible to contribute***

Married Filing Separately (live with spouse)

Less than $10,000

Reduced contribution**

$10,000 or more

Ineligible to contribute***

Single, Head of Household, Married Filing Separately (did not live with spouse)

Less than $122,000

$6,000*

$122,000 to $136,999

Reduced contribution**

$137,000 or more

Ineligible to contribute***


*If you are age 50+, you can contribute an extra $1,000 per year for a total of $7,000.

**As you begin to earn a higher income, the amount that you can contribute will be reduced.  Your financial advisor will use a formula to determine this specific dollar amount.

***While you may be ineligible to contribute directly to a Roth IRA, you may be able to contribute using the “backdoor method.”


Backdoor Method

Once your income reaches a specific limit, you are no longer eligible to contribute directly to your Roth IRA account.  However, higher earners can use a backdoor strategy to bypass these restrictions and continue to fund their Roth IRA.

Investors may find it beneficial to begin with a traditional IRA since anyone, earning any amount, can make a contribution of any size.  Once established, it can then be converted to a Roth account; though the funds, and any investment earnings, will be taxed before it is rolled over.

A financial advisor can guide you through the process of contributing to a Roth through the “back door” and can help you stay mindful of any tax implications.


How Do I Open a Roth IRA Account?

Once you have decided that a Roth IRA is the right retirement account for you, contact your financial advisor for help in establishing the account.

Your account can be opened directly with Howard Capital Management, Inc. (HCM) or with another institution like a bank, credit union or broker such as E*Trade.  HCM can also serve as your money manager, however if your account is located elsewhere, it would first need to be transferred to HCM.


When Can I Withdraw Funds?

Similar to making contributions, there are also rules regarding withdrawals from a Roth IRA account.  You can withdraw your direct contributions at any time, without taxes or penalties.  However, for funds that were converted into your Roth (i.e. through the backdoor method), you must wait at least five years before you can make a penalty-free withdrawal.

To withdraw any investment earnings, your account must have been established at least five years prior AND you must be at least age 59 ½.  If these two requirements are not met, the funds you withdraw may be subject to taxes or fees. The only exception is a qualified distribution in which the investor can be younger than 59 ½ but still must wait at least five years after the account was created.  Additionally, the withdrawn funds must either be used towards the purchase of a first home or needed because the account holder has become disabled or has passed away and the money is being transferred to a beneficiary.

Also, Roth IRA’s do not have a required minimum distribution (RMD) so unless they are needed, leave the funds in your account and let them continue to grow!


Contact Howard Capital Management, Inc.

At Howard Capital Management, Inc. (HCM), we understand how important it is to work with someone you trust, that will create and deliver on a personalized plan which has your best interest in mind. By planning for your financial future now, you can make your retirement an exciting and smooth transition.