by Amy Lawson, MBA, CDFA®
For the investor seeking tax-free dollars in retirement, there are very few options. Very few. One is the IUL, which we talked about last week. Another is the ROTH, let’s talk about it now.
So, What Is a ROTH?
Think of the ROTH as a bucket, or better yet, think of it as an exquisite handbag filled with money from which you can pull out said money in retirement without paying taxes on it.
How Can This Be, You May Ask? How Can I Have Tax-Free Retirement Income?
The beauty of the ROTH is that it is funded with dollars you’ve already paid taxes on. And, because you’ve already paid your taxes on the money you’ve invested, your money grows tax-free. Awesome, isn’t it?
Is There More Than One Type of Roth?
There are three types of ROTHs. The first is the ROTH 401(k). The second is the ROTH IRA. The third is the ROTH annuity. The ROTH 401(k) is offered through one’s employer, typically as part of a traditional 401(k) plan. The ROTH IRA is an individual account. The ROTH Annuity is a variable annuity purchased inside of a ROTH IRA.
As I mentioned in my blog, “Annuities vs The Honda Accord…” I don’t think highly of variable annuities because they are expensive, they do not offer the best investments options, and you can lose all of your money.
What If My Employer’s 401(k) Doesn’t Offer a ROTH?
Ask your employer to add it! While many 401(k)s offer the ROTH “handbag,” those that don’t can easily add it and it’s relatively inexpensive to do so.
Does Everyone Qualify?
Everyone qualifies for a ROTH 401(k), regardless of income. However, not everyone qualifies for a ROTH IRA. The Internal Revenue Service, widely known as the IRS, sets income limits on who qualifies. So, depending on how much you earn and how you file (single, married filing jointly, married filing separate, etc.), you may qualify for a ROTH IRA. Want to know if you qualify? Click here: Income Limits.
How Do I Set Up a ROTH?
Assuming your 401(k) offers the ROTH feature and you can access your 401(k) online, you should be able to log on and add the ROTH, or, call the Participant’s Help Line. Otherwise, ask your company’s Human Resource person for instructions.
You can open a ROTH IRA at most brokerage houses, banks, and mutual fund companies. But, not all providers of ROTH IRAs are created equal, so look for a provider with following features:
- Offers a wide range of low-cost investments, not just their own
- That allows you to make automatic purchases each month without incurring monthly transaction charges
- That charges a low annual fee, if any
Not a do-it-yourselfer? No worries! We’re here to help!
How Much May I Contribute?
At no surprise, the IRS sets limits on how much you may contribute to both. If you have a ROTH 401(k), you may contribute up to $19,500, unless you are 50 or older, then you may contribute an extra $6,500 for 2020 for a total of $26,000.
If you have a ROTH IRA, you may contribute up to $6,000, unless you are 50 or older, then you may contribute an extra $1,000 for 2020 for a total of $7,000. Want to see how much YOU may contribute? Click here: ROTH IRA Contribution Limits.
How Do I Contribute To a ROTH?
If you have a ROTH 401(k), contributions come from your paycheck. Your employer withholds the desired amount from each paycheck and submits it to the plan each pay period. Note: If your employer offers a matching contribution, aka, a MATCH, the match will be made with pre-tax dollars, which means you’ll pay tax on those match dollars when you take them out.
If you have a ROTH IRA, you may contribute monthly or annually, either by mailing a check to the transferring brokerage house, bank, or mutual fund company that custodies your ROTH or by sending the money electronically (known as an electronic funds transfer – not to be confused with a wire transfer) from your bank to ROTH.
NOTE: Electronic Funds Transfers are typically free and take only a couple of days. Wire Transfer are quicker but can cost between $22 and $29 for domestic wire transfers and about $50 for international.
When May I Take Money From My ROTH Without Penalty?
If you are over age 59-1/2 and have had the ROTH for at least five (5) years, you may take a distribution from your ROTH without penalty. If you take a distribution prior to age 59-1/2 or have had the ROTH less than 5 years, then you can expect to pay a 10% penalty.
Am I REQUIRED To Make Money From My ROTH at Some Point?
Unlike the Traditional IRA or typical 401(k), you are NOT required to take a minimum distribution beginning at age 70-1/2. Why? Because Uncle Sam has already gotten his portion of YOUR money!
What Types of Investments Can I Put Into My ROTH?
You may purchase stocks, bonds, stock mutual funds, bond mutual funds, money market funds, stock exchange-traded funds, bond exchange-traded funds or any combination thereof. Or, you may keep the money in cash. While some companies that sell gold claim you can put gold in your IRA, that statement is a little misleading in my opinion, here’s why: You give them dollars with which they buy gold and put into your IRA. HOWEVER, when you want to take a distribution, they will sell your gold and give you dollars. If you’re buying gold because you don’t like or trust the buying power of the dollar, why would you want to ultimately end up with dollars?
Have other questions? Ask away! We’re here to help!
Wishing you peace & plenty of tax-free dollars!
Your gray girlfriend,