Is a Roth IRA Right for Me?

Is a Roth IRA right for you? Here’s some important advice to consider.

Planning for that time in your life when work will be optional (aka retirement) is something we all need to do. Here at Summitry, we offer financial planning to families during all phases of their working lives to make sure they take the necessary steps to securely position themselves for a successful retirement. We recently received the following question in an email from a client: We are considering contributing to a Roth IRA. What are your thoughts?  

This isn’t the first time we’ve been asked this question. Contributing to a Roth IRA is a powerful way to build wealth, but there are a few considerations to keep in mind in determining whether it’s the right option for you. 

The difference between Traditional and Roth IRAs

Roth IRA returns compound on a tax-free basis, meaning earnings/gains are not taxed inside the account and distributions in retirement are not taxed. This is different from Traditional IRAs, where returns compound on a tax-deferred basis, which means earnings/gains are not taxed inside the account, but distributions in retirement are taxed. 

That said, contributions to Roth IRAs are after-tax in that the amount you contribute does not reduce your taxable income. This is unlike Traditional IRAs where you’re contributing pre-tax dollars. So if you earn $100,000 and contribute $5,000 to your Traditional IRA, your taxable income becomes $95,000 (all else being equal). 

Here are a few key points to consider as part of your decision:

• The max contribution limit to a Roth IRA is $6,000. If you’re over the age of 50, you can add $1,000, so $7,000 for each you and a spouse if you are “married filing jointly” and your household income is less than $196,000.
• IF you are “married filing jointly” and your total household income is more than $206,000, NO contribution to a Roth IRA is allowed (Roth conversions are still an option).
• IF you are “married filing jointly” and your total household taxable income is between $196,000 and $206,000, your contribution is reduced.
• If your spouse already has a Roth IRA and you both want to make contributions to your respective Roth IRAs, please note that contributions to Roth IRAs that are not part of Roth conversions can only be made out of earned income.

Of course, a Roth IRA contribution is just one aspect of your financial plan. Here are a few more questions you can ask yourself in the process: 

•  Are you contributing the max to your 401(k)? Max contribution is $26,000 ($19,500 + $6,500 over 50)
• Is it a Traditional 401(k) or Roth 401(k)?
• If you’re contributing to a Traditional 401(k), do you have a Roth 401(k) option? 

The reason these questions are important is that there is a case to be made that you should max out your 401(k) contribution before contributing to a Roth IRA. If you have a Roth 401(k) option, it may make sense to contribute to it rather than to a Roth IRA, because contribution limits are higher and there is no income cap. For tax planning, it may make sense to split your max contribution to 401(k) between the Traditional 401(k) and Roth 401(k) if available. For example, if you want to reduce your taxable income by $10,000, you could contribute $10,000 to your Traditional 401(k) and the remaining $16,000 to the Roth 401(k).

Yes, this is a lot of information, but it really only scratches the surface on all the items to consider before deciding if the Roth IRA would be a good solution for you. There’s a lot of material to research and “rules” to consider, but what’s most important is for you to look at your unique situation and goals and determine what’s best to do. A financial planner can help. Our objective is to help you reach your goals and achieve new heights by taking action on the “the best thing for YOU.”   

We are happy to help. Contact us today!

This article is for informational purposes only. Nothing in this article constitutes investment advice or any recommendation that any particular transaction or strategy is suitable for any specific person.