Guest view: There's more than one way to save in a Roth
Your buddy at work has been bragging about his investing and financial planning prowess, and you've just about had enough.
Swilling a cup of coffee, he spends the morning highlighting for you every one of his successful stock picks and how much money each has made him. Over lunch he lures you to his table in the company cafeteria with an offering of one of his wife’s famous homemade peanut butter cookies. Before you realize you’ve been duped, he’s already slipped into a soliloquy on the income strategy he’s building for his family, which avoids tax consequence at every turn.
In the afternoon as you attempt to abscond unnoticed to the parking lot to find your car, he lurches up behind you to extol the virtues of his Roth IRA savings technique and how beneficial that tax-free bucket of savings will prove in his estate planning.
The guy is married, and surely between his and his wife’s income they both are making well over the combined limit to save into a Roth IRA ($196,000 in 2017). And isn’t that the same thing that’s held you back from taking advantage of saving into a Roth IRA?
Back it up a minute
Before we go any further, let me bend your ear about the benefits of the Roth, lest your buddy do that for you and send you into a coma of self-preservation.
What you save into a Roth IRA represents post-tax savings, it then grows tax-deferred, and in retirement even the growth that has never been taxed can be distributed totally tax-free.
For those savers who expect to be in a higher income tax bracket in retirement than they are today, the benefits can be considerable. But even those savers who think their tax rate today is higher, there remain plenty of benefits to the ROTH.
Remember, Roth IRAs do not require “minimum distributions” after age 70 ½ like traditional IRAs do. And Roths can be passed on just like traditional IRAs in a tax-efficient way to your beneficiaries thus superceding the will and escaping probate. Because of this, Roths can serve as helpful estate planning tools for transferring wealth.
Finally, in a pinch, the savings that have been made into Roth IRAs can be accessed five years after the initiation of the Roth even if the owner is well under 59½ years old. To the extent that early distributions from the Roth represent the investor’s savings into it, those distributions can occur free of penalties and double taxation.
What’s not to love?
Is there another way?
Back to your buddy, how’d he get so much saved into a Roth to confidently brag about his Roth “strategy”?
Roth IRAs only allow for $5,500 in savings in 2017 ($6,500 if you’re over 50) and that’s for savers whose income hasn’t yet priced them out.
Maybe he converted an old traditional IRA into a Roth . But who wants to pay income taxes on the money you convert to the Roth anyway? And besides, his brother-in-law is a CPA who likely wouldn’t condone paying income taxes on a lump sum at his tax rate today.
I’m going to give you a little something to spring on your buddy in the midst of his next self-congratulatory diatribe: the Roth 401(k).
Most 401(k) plans now come equipped with traditional and Roth options, and the best part about the Roth savings option is that it comes with nearly all of the benefits of the Roth IRA and a few more to boot.
401(k) plans allow for quite a lot of annual participant savings ($18,000 or $24,000 for those over 50 years old in 2017), and should the participant decide to save all of that in the ROTH side of the plan, he absolutely can regardless of his family’s income.
That’s right, a full $24,000 can be saved in 2017 into a Roth 401(k) for those 50 years old or older and the Roth IRA income limits don’t apply.
One detriment of the Roth 401(k) is that if you leave your money there after age 70½, you will be required to take minimum distributions while you are living. A word the wise, most investors will roll their Roth 401(k) to a Roth IRA upon retirement and avoid that pesky requirement.
Do your homework, understand the rules, and get a certified financial planner on your side to help you make the best decisions for your own financial situation.
Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at firstname.lastname@example.org.
Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.