Examining The Roth IRA

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Aug 25, 2020


Examining The Roth IRA

From Lee Sherbakoff,

The Nalls Sherbakoff Group, LLC

Dear Friends,

There are many vehicles to choose from as you travel the road to retirement. One of the more advantageous means you may utilize to build a nest egg is the Roth IRA. A Roth IRA is an Individual Retirement Account that allows you to contribute after-tax dollars into a savings or brokerage account. With a Roth IRA, you get no up-front tax deduction, as you do with a traditional IRA, 401(k) retirement plan, or other tax-deferred account. However:

  • You pay no tax on either principal or earnings when you withdraw your money (although you must be at least age 59½ and have had the Roth for five years).
  • There’s no time requirement on when you have to withdraw money (no Required Minimum Distributions), an appealing option for those wanting to leave the money to heirs.

Like a traditional IRA, interest, dividends, and capital gains are sheltered from taxes inside the Roth.

Tax Time

Subject to income limits, you may contribute up to $6,000 per year if you are under age 50 and $7,000 per year if you are age 50 or over. We are past the tax deadline for 2019, but it’s not too early to begin thinking about 2020. However, let’s be aware of income limits.

For someone filing taxes who is single (or head of household), you are eligible to make the full contribution to a Roth if your modified adjusted gross income (MAGI) is under $124,000 for the tax year 2020. The limit gradually declines between $124,000 – $139,000. Above $139,000, Roth contributions are not allowed.

If you are married and filing separately, the rules become a little more complex so let’s talk if you are in this category.

If you are married and file jointly (or qualified widow/er), MAGI must be under $196,000 for the tax year 2020, while the contribution limit is gradually phased out between $196,000-$206,000. Above $206,000, Roth contributions are not allowed.

You may contribute to a Roth and a traditional IRA, but you may not exceed the prescribed annual contribution limits.

Under the SECURE Act, an inherited Roth IRA (and a traditional IRA) must be distributed within 10 years if your beneficiary is not your spouse (in most cases). And, unlike a traditional inherited IRA, the distributions are tax free. Beneficiaries may let the inherited Roth IRA account grow tax free until year 10, when the non-taxable distribution is required. 10 years of tax-free growth and tax-free distributions make the Roth IRA an attractive estate planning vehicle.

If you have questions about Roth IRAs and their features and benefits, or wondering if they’re right for you, give us a call.  A Roth IRA’s tax-free growth and tax-free distributions to you or your beneficiaries can be quite appealing in the long run.

Best,

The Nalls Sherbakoff Group, LLC

DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.