Are you wondering if you should invest in a Roth Individual Retirement Account (IRA)? Any money you put into these accounts will grow tax free. What other benefits do these retirement savings accounts offer?.

What is a Roth IRA?

A Roth IRA is a special individual retirement account that you fund with post-tax dollars (you are not permitted to deduct your contributions to the account from your income taxes). Earnings on the account and withdrawals after age 59½ are income tax-free as long as the account has been in existence for five years.

Contrary to a Roth IRA, a traditional IRA is a tax-deferred retirement savings account. In a traditional IRA, you pay income tax on your withdrawals.

What are the benefits of Roth IRAs?

The benefits of Roth IRAs include:

• As you let your savings accumulate, you do not owe the IRS a dime, as long as you have reached age 59 ½ and the account has been in existence for 5 years.
• While it is best to leave your money in the account until retirement, you can withdraw your contributions at any time, tax and penalty free. Note that this applies to your contributions, not your earnings—if you withdraw earnings before age 59 ½, you will be subject to a 10% penalty and face a tax bill on the withdrawn money.
• You can withdraw from your Roth for a first-home purchase- You can use your contributions for the down payment and withdraw up to $10,000 of earnings tax and penalty free if the account has been open for at least five years. This doubles to $20,000 for couples if they each have a Roth.
• You can withdraw up to $5,000 and avoid the usual 10% early withdrawal penalty following the birth or adoption of a child (you must withdraw the funds within one year from the date your child is born or the adoption is finalized). In fact, each spouse can withdraw $5,000 from his or her own account, penalty free.

In addition to being great tax savings tools for retirement, Roth IRAs also provide tremendous estate planning advantages—especially if you can get a large portion of your wealth into an account.

Getting a large portion of money into a Roth IRA can be difficult and can take many years of annual contributions. However, converting an existing traditional IRA or SEP account into a Roth IRA can be a quick and easy way to do this. There are no limitations on the size or number of accounts you can convert. There are taxes associated with this conversion but it may be worth it depending on your personal financial situation.

A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you are deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So, the conversion would trigger a current income tax bill. In some cases this income tax bill is outweighed by some of the positive factors of a ROTH IRA, listed above.

Questions on setting up a Roth? Contact our Wealth Management Team.