These days, retirement planning will likely involve Individual Retirement Accounts in one way or another. Whether you’re looking to roll over a 401(k), optimize your withdrawal timing, or take advantage of catch-up contributions, your IRA strategy may be one of the main components of your income strategy. So, let’s talk about the Roth IRA and its unique value at the end of the calendar year.
What is the Roth IRA, and When is it Useful?
The Roth IRA is a type of retirement account that you may withdraw from tax-free after a certain age and after holding it for a period of time. The Roth is contributed to after tax, meaning that contributions are still counted as income, whereas the Traditional IRA deducts your contributions from your income for the current tax year and is taxed as regular income during the year you withdraw. Also, note that there are contribution limits that reset after each calendar year.[1]
These IRAs can be useful when executing a retirement tax strategy. If you’re looking to control your taxable income levels and tax brackets in retirement, the Roth IRA and Traditional IRAs can be used together in a comprehensive income strategy over the course of your retirement timeline.
Why Open a Roth at the End of the Year?
When it comes to a Traditional IRA, as long as you are 59.5 years old, you can withdraw from it whenever you want.[2] But what if you don’t have a Roth and want to take advantage of its tax-free withdrawal benefits? You might consider opening a Roth IRA… But remember, you can’t withdraw penalty-free from the account without being 59.5 years old and holding the Roth IRA for 5 calendar years. In addition, your contributions will be subject to the IRA contribution limits for that year.[3]
So, here’s the strategy: If you’re thinking about opening a Roth IRA, do so before December 31st and max out your yearly contributions for the current year and then do so again the following year once January 1st comes. This way, your account can be categorized as having been opened for the current year, and you can max out your contributions for both years! Following this strategy, you should be able to withdraw from the IRA after 4 years instead of 5 because you slipped in just before the turn of the year. Plus, you’ll be able to contribute your max for both the current and following year, allowing you to fund your account quicker than you would have otherwise.
Your IRA strategy may be crucial to your retirement plan, but there is no one right way to do it. Your strategy is unique to you and your financial situation, so if you have questions about whether a Roth IRA can work for you, Click HERE to sign up for a complimentary review with us at LakePoint Advisory Group.
[2] https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp
[3] https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp
Lake Point Advisory Group is a tradename. All services provided by Lake Point Advisory Group investment professionals are provided in their individual capacities as investment adviser representatives of Mercer Global Advisors Inc. (“Mercer Advisors”), an SEC-registered investment adviser principally located in Denver, Colorado, with various branch offices throughout the United States doing business under different tradenames ,including Lake Point Advisory Group.
This material is provided for informational purposes and is not an offer to sell or a solicitation of an offer to buy an interest in any security or to engage in any investment strategy. Such an offer may only be made at the time a qualified offeree receives a confidential private offering memorandum or other appropriate disclosure. This report is intended as a summary; it does not purport to be complete. Information contained herein is believed to be accurate and/or derived from sources which we believe to be reliable; however we do not warrant the completeness or accuracy of such information. Opinions expressed herein do not necessarily reflect those of Lake Point or Mercer Advisors. You should not construe this presentation or any other communication received in connection with Lake Point as legal, accounting, tax, investment, or other advice. You should consult with your own counsel and advisors regarding such matters. Past performance is not necessarily indicative of future results. No representation is made that any investment will or is likely to achieve the same or similar results in the future. Investments cannot be made in an index. Alternative investments are subject to greater risks than those associated with traditional investments and are not suitable for all investors.
