Roth savings: Right for you?

I had a client recently ask me about Roth IRA’s. She said that she was listening to a national talk show host who was speaking on how remarkable Roth IRAs are and cited an example of an individual who accumulated $250,000 in a Roth IRA and will have the wonderful tax benefits that Roth savings allow. She said “I know we’ve discussed this with you before, but I can’t remember why we aren’t doing this. It seems like a no-brainer.

Roth IRA’s and Roth options in a 401(k) allow the account owner to contribute after-tax dollars which can grow tax deferred and, if IRS rules are followed, the earnings can be withdrawn tax-free. My favorite analogy comparing Roth to traditional retirement savings vehicles is the seed and the harvest story. Under Roth rules, you pay tax on the seed, and the growth and harvest can be tax free. Under traditional IRA’s and other similar accounts, you do not pay tax on the seed or the growth, but pay tax on the harvest (at ordinary income tax rates on the amount withdrawn). Roth options can be powerful long-term growth vehicles and retired clients who have Roth dollars are incredibly happy when the money withdrawn is not subject to taxation or inclusion in adjusted gross income.

So why did I recommend this client not partake in Roth contributions? In her and her husband’s situation, their current adjusted gross income is subject to high income tax rates. She and her husband are not too far from retirement. They expect to have no debt in retirement and their income needs will be much lower than they currently are, putting the hard-working couple in a lower tax bracket in their retired years than they are now. Therefore, in their individual situation, it makes more sense to contribute to traditional retirement savings vehicles, taking the tax deduction now. When their adjusted gross income is lower, we can look to convert money from their traditional IRAs to Roth IRAs.

Roth IRAs are among the finest of options for investors; personally, I advocate saving as much as you can in your early working years. Starting Roth IRAs for our own sons was a priority in the first year that each of them had W-2 income. Like any other financial decision, contributions and conversions should be evaluated on an annual basis to determine what is right for you.

LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com.  www.SchulferAndAssociates.com

_{The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.}

_{Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.}

_{All investing involves risk including loss of principal. No strategy assures success or protects against loss.}

_{This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.}