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 foryou 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 lie'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.
Hold up.
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 (
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 foryou 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,
Finally, in a pinch, the savings that have been made into
What's not to love?
Is there another way?
Back to your buddy, flow'd he get so much saved into a Roth to confidently brag about his Roth "strategy"?
Maybe he converted an old traditional IRA into a Rotii. 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.
There is
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 allowfor quite a lot of annual participant savings (
That's right, a full
One detriment of the Roth 401(k) is that if you leave your money there after age 70'/¡, 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.
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