Written by Douglas Velnoskey
Roth Contributions: The Roth IRA is an individual retirement account. Its greatest benefit is its income tax friendliness. Although your contribution isn’t tax deductible, the investment grows tax-free and is distributed tax-free, if you follow the withdrawal rules.
Contributions
You are allowed to withdraw contributions to your Roth IRA at any time. The rules require you to be 59½ or over and have held the Roth IRA account for 5 years to make tax-free and penalty-free withdrawals of the earnings on the contributions.
Unlike a traditional IRA where deductible contributions are made, there is no Required Minimum Distribution, often called an RMD, from a Roth IRA when you turn 73 or 75 years of age under current rules. Having sources of tax-free income in retirement provides flexibility and tax management for larger expenses during retirement. A Roth is also tax-free to the beneficiaries.
“Back Door” Roth Contributions
The ability to contribute to a Roth IRA is subject to contribution limits. If your income exceeds the limits, you may be able to utilize what’s referred to as a “Back Door” Roth contribution. In this strategy, you make a non-deductible contribution to a Traditional IRA and immediately convert it to a Roth IRA.
This strategy becomes complicated if you own a Traditional IRA. In that case, a “Back Door” conversion makes part or, in some cases, almost all the “Back Door” conversion amount taxable. This is not an issue if you only have a 401(k) account.
Conversions
Converting a portion of an IRA account into a Roth IRA is a taxable event. This strategy is best utilized in years where income may be lower, for instance after retirement and prior to having to begin Required Minimum Distributions (RMD’s) from IRA accounts. You pay the tax upon the conversion, however you and your beneficiaries never have to pay income tax on withdrawals.
The concepts illustrated here have legal, accounting and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your particular circumstances. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest. Douglas P. Velnoskey, CFP, Executive Vice President/Wealth Management, Financial Advisor, Westminster, MD. 443-201-2088 velnoskeywmg@janney.com Janney Montgomery Scott LLC. Member: NYSE, FINRA, SIPC
