The Value of Opening a Roth IRA at the End of the Year Lake Point Advisory Group Mercer Advisors

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.



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