Roth IRA
The Henssler Financial Group Position Paper

 

The Henssler Financial Group Wealth management

A Roth IRA is a retirement account in which contributions and earnings grow tax-free. Contributions are not tax-deductible, and are made with after-tax earned income. Contributions can be made at any time. Distributions are tax-free provided the following requirements are met:

  • Five years have elapsed since the initial contribution, and
  • The distribution is due to:
    • Attainment of age 59½;
    • Death or disability, or
    • First home purchased (limited to $10,000).

Contributions are limited to $5,000 in 2008. Those age 50 or older may make a "catch-up" contribution as well. The catch-up contribution is $1,000 in 2008.

Eligibility for Roth contributions is limited to individuals with Adjusted Gross Income (AGI) of less than $101,000, or for couples filing jointly with AGI of less than $159,000. Partial Roth contributions are available to those in the AGI phaseout ranges (for individuals $101,000 to $116,000, for couples filing jointly $159,000 to $169,000).

Roth IRAs are not subject to mandatory distribution rules and contributions can continue regardless of age. This benefits the investor with a source of income other than an IRA and makes the Roth IRA an estate-planning tool as well.

Advantages of a Roth IRA

  • "Qualified distributions" from a Roth IRA are not subject to federal income tax. Contributions may be distributed at any time without being subject to federal income tax.
  • Roth IRAs are not subject to mandatory distribution requirements during the life of the owner. Contributions after age 70½ are permitted if the taxpayer has compensation.
  • One feature that many are not aware of is that after a five-year waiting period, any amount converted from a traditional IRA may be withdrawn without penalty, regardless of age (initial conversion amount only, not earnings on this amount). This gives the owner a great deal of flexibility if properly planned.
  • Another potential advantage of a Roth IRA is estate planning if the IRA holder intends for the Roth IRA to be left to heirs. Heirs must pay income taxes on withdrawals from an inherited traditional IRA, but if they properly opt for a lifetime income stream from an inherited Roth IRA they won't have to pay income tax on the money as they withdraw it.

Converting from a Traditional or Rollover IRA to a Roth IRA

It is best to discuss with a financial planner whether you should convert all or some of your funds, as your specific individual situation may present unique reasons either to convert or to avoid converting. However, in general, to provide you with the greatest after-tax return, follow the steps below:

  • If your AGI exceeds $100,000 during the year, you do not qualify for a Roth IRA conversion. If not, proceed below.
  • Can you wait at least five years before using any of the money? If yes, continue with last question. If not, DO NOT convert.
  • What do you anticipate your marginal tax bracket (MTB) will be when you begin withdrawals? If your MTB will probably be lower, consider maintaining a traditional IRA. If your MTB will likely be higher or equal, and you can pay taxes by using funds other than tax-deferred accounts, consider converting to a Roth.

The other reason to convert to a Roth IRA is for estate tax planning purposes. This reason could possibly outweigh the reasons to not convert for some people.

Bottom Line

The Henssler Financial Group recommends making a Roth IRA contribution if you are eligible. If you are not eligible, in most cases, you are probably better off avoiding a Traditional IRA contribution with after-tax dollars, with a few exceptions. If you are a frequent trader, the Traditional IRA allows you to realize capital gains without paying capital gains taxes at the time you sell. Also, if you have most of your assets in taxable accounts, a small portion added to an IRA gives you some diversity, just in case tax law changes in the future and make the Traditional IRA more attractive. Otherwise, under current tax law, you are probably better off investing funds in a taxable account. Of course, as tax laws change, so will these recommendations. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.

 

 
©2008 The Henssler Financial Group | www.henssler.com