To Roth or not to Roth in your IRA

That is the question…but the Roth savings option is often as misunderstood by people as Shakespeare. Get to know some of the benefits and considerations of the Roth so that ‘thee can maketh an informed own choice.’

As a Wisconsin public school employee, maybe you’ve heard the story of the three legged stool that illustrates the need to save for retirement. One leg is the Wisconsin Retirement System, the second is Social Security, and the third is personal savings. Imagine trying to sit on that stool without all the legs. It will be difficult and you’ll be struggling…a real tragedy.

So it’s important to have personal savings to supplement your retirement. One option is a Traditional or Roth IRA. But when it comes to choosing between the two, few people understand the differences or the unique characteristics of the Roth. The Roth isn’t just for younger folks...it offers benefits to people of all ages.

Learneth more about the Roth IRA

roth scrollAs long as you don’t exceed the income provisions and have earned income, you may qualify for the Roth IRA. The Roth can help you balance your retirement plan by controlling your tax liability when you retire. It also includes many other benefits, some of which you may not be aware of.

The main difference between a Traditional and a Roth IRA is when taxes are paid. In a Roth, money going into your account is after tax so that your future qualified withdrawals, including earnings, are tax free in retirement (assuming the Roth IRA has been open for at least five tax-years and you’re older than age 59½). One way to think about it is that the Roth offers tax-exempt savings (you’ve prepaid the taxes so later qualified withdrawals are tax free) while the Traditional IRA offers tax-deferred savings (interest accumulates tax free until you make withdrawals, which are then treated as taxable income).

Regardless of the type of IRA, contributions for 2019 cannot be more than $6,000, or $7,000 if you’re age 50 or older, or your taxable compensation for the year if it was less than this dollar limit.

Contributions can be made up to the tax filing deadline (you have until April 15, 2019, to make a 2018 contribution).

Valorous reasons to consider the Roth

‘Tis wise to consider a Roth IRA as there are a number of potential benefits from investing in one.

Flexibility  

  • If you want to make withdrawals before you retire, you can tap your contributions (not your earnings) at any time—tax and penalty free. Roth money, including earnings and up to a lifetime IRA maximum of $10,000, may be used toward a first home after you’ve had the account for five years. You may also qualify for penalty-free withdrawals on assets earmarked for college expenses for yourself, your spouse, your children or grandchildren (great grandchildren, too!). Note: Taxes may apply to earnings withdrawn for this purpose.
  • While the Roth IRA is designed for long-term savings, distributions can be taken tax- and penalty-free, provided the account is five years old, if you are over 59 ½, or in case of disability or death, making it more flexible than other retirement savings accounts.
  • The Roth is portable. Changing jobs doesn’t affect account status or require changes.

Accessibility

  • Folks of any age can contribute to a Roth IRA as long as they have earned income from a job…so even a teenager with part-time work can start saving early in life and really benefit from compound interest.
  • If you open a Roth through Member Benefits, your family members may also qualify to open an account.*

No required minimum distributions and continuous saving

  • Unlike a Traditional IRA, the Roth has no required minimum withdrawals at age 70½. This allows your account balance to continue growing for as long as you like.
  • You can also continue to contribute to the Roth IRA after age 70½ as long as you are working.

Benefit thine heirs

  • You can pass on your Roth funds after you die and your heirs will still receive distributions in the same tax-free way you would have.
  • In addition, if your beneficiary chooses to “stretch” your Roth IRA across generations, those distributions are generally not taxable.

It’s easy

  • Whether you choose the Roth or Traditional IRA, it’s easy to take advantage of dollar cost averaging, which is purchasing a fixed dollar amount at regular intervals over a long period of time. Setting up automatic contributions from your checking or savings account, or using payroll deduction if your school allows, makes it simple to do and keeps you on track.

Some things to ponder

It is possible to make too much money to open a Roth IRA. Income limits can change annually, so check irs.gov for the latest updates. But if you already have a Roth and your single or joint income exceeds the limits, don’t worry…you won’t have to liquidate it, you just won’t be able to make additional contributions.

Secondly, while the Roth gives you tax flexibility in retirement, it does not lower your taxable income today like the Traditional (pre-tax) IRA.

Thou has’t low fees and resources with Member Benefits

With Member Benefits, you can take advantage of:

  • Low annual administrative fees (0.45%) and annual fee cap of $600 for WEAC members or $750 for nonmembers.**
  • Calculators on Roth IRA contributions, conversions, and comparisons to the Traditional IRA.
  • Free one-hour financial consultation to evaluate your savings options and set goals.
  • Articles and blog posts on retirement savings topics of interest.

“To thine own self be true”

Only you can decide which savings option is best for you. Much depends on what you believe your tax bracket will be in the future and whether the deduction is worth more today than tax-free income in the future. Uncertainty on future tax rates and policies may further complicate the decision. Our financial planners can help guide you to make an informed decision. Just make an appointment by calling 1-800-279-4030.

The best way to avoid a tragedy? Regardless of the plan you choose, get started now! Shakespeare’s King Lear may not have known about IRA plans, but his famous line could apply to not saving for retirement: “Nothing will come of nothing.”

This article is for informational purposes only and is not intended to constitute legal, financial, or tax advice. Consult your tax advisor or attorney for advice specific to your unique circumstances before taking action.

*Wisconsin residency required. **Minimum annual fee of $25 for inactive accounts. Inactive accounts are accounts with no contributions within a calendar year.

The Trustee Custodian for the WEAC IRA accounts is Newport Trust Company.

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