A Portfolio Plus: Six Reasons to Consider a Roth IRA


In an effort to save on taxes during retirement, more people are choosing Roth IRAs for their unique tax benefits. Let's look at six reasons you might consider adding a Roth IRA to your current portfolio.

1. Grow and Withdraw Money Tax-free

Because contributions to a Roth IRA are made with after-tax money, there is no tax deduction for contributions. However, interest earned on the money may be withdrawn tax-free, if conditions are met.
At any time and for any reason, you may withdraw up to 100% of your contributions without taxes or penalties. Earnings distributed are tax-free after the completion of a 5-year aging period on the account, starting with the first taxable year after you begin contributions and one of the following conditions are met:
• 59½ or older
• Disability or death
• Purchasing your first home (a $10,000 exception)

2. No Required Minimum Distributions (RMDs)

Unlike Traditional IRAs and generally 401(k)s, 403(b)s, and other employer-sponsored retirement plans, a Roth IRA does not require you to take a minimum distribution during your lifetime. This benefits you if distributions are not neccessary for living expenses. Since you are not required to take minimum distributions, your money may continue to accumulate, leading to the third reason you might consider a Roth IRA.

3. Protect Beneficiaries from Taxes

Having no required minimum distributions means you may be able to leave more to your heirs. Upon your death, RMDs are required for inherited Roth IRAs; however, those distributions generally may still be taken tax-free. Conversely, income inherited from a Traditional IRA is taxable. Those taxes may be significant if the inherited amount pushes your heirs into a higher tax bracket.

4. Increase Tax Flexibility in Retirement

Adding a Roth IRA to your retirement portfolio may offer a way to decrease tax liability. This is accomplished by using distributions from both a Traditional IRA and Roth IRA. For example, if you want to stay within a certain tax bracket, you can withdraw money from a Traditional IRA up to the tax bracket’s ceiling and then use Roth IRA withdrawals for any needs above that ceiling.

5. Reduce or Avoid the Medicare Surtax

The Medicare surtax is calculated according to your modified adjusted gross income (MAGI). Qualified Roth IRA withdrawals don’t count toward MAGI, whereas RMDs from a Traditional IRA do. RMDs may increase your vulnerability to the surtax depending upon your income in retirement.

6. Contribute as Long as You Have Earned Income

With a Traditional IRA, you are not allowed to contribute past age 70½, even if you have earned income. A Roth IRA, on the other hand, allows you to contribute as long as you have earned income, no matter your age. This helps maximize earnings during your lifetime.

2013 Annual Contribution Limits*:

• Under age 50 — $5,500
• Age 50 or older — $6,500

*Income limitations may apply. Contact your tax advisor.

With so many good reasons to consider a Roth IRA, contact us today to see if adding one to your retirement portfolio would be beneficial to you.

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