This time last year the CARES Act prompted many investors to consider a Roth IRA conversion. Everyone’s circumstances are different but it may be worth exploring the benefits of a Roth IRA. Of course, you should also consult a tax professional before making any decisions.
REDUCE FUTURE TAXABLE RMDs
Roth contributions are funded with after-tax dollars, meaning there’s no deduction at the time of your deposit. However, when the money is withdrawn from the account no income tax is due, even if your tax rate has increased.
NO REQUIRED MINIMUM DISTRIBUTION FOR ROTH IRA OWNER
Unlike traditional IRAs, there is no RMD requirement during the account holder’s lifetime. This allows you to leave funds untouched and let the account grow tax-free for heirs. However, beneficiaries must take RMDs.
NO ROTH IRA TAXES ON EARNINGS
Roth IRA holders will never pay taxes on any investment returns in the account as long as they follow the withdrawal rules. This applies to beneficiaries as well.
TAX-FREE WITHDRAWALS
Qualified withdrawals are tax and penalty-free. The rules vary depending upon age and how long the account has been held. However, you should adhere to the following guidelines:
- Withdrawals must be taken after age 59 1/2
- Withdrawals must be taken after a five-year holding period
- There are exceptions to the early-withdrawal penalty such as a first-time home purchase, college expenses, and birth or adoption expenses
ROTH IRAS WILL NOT AFFECT CURRENT OR FUTURE TAX RATES
Since contributions are made with after-tax dollars, Roth IRA withdrawals will not affect your current or future tax rate. This can also remove any uncertainties or concerns about your future tax rate.
For more information, read our article about contributing to an IRA and Contact a Churchill Management Group advisor at (877) 937-7110 or [email protected] to help you take the next steps in developing a retirement plan.
Written by Scott Perkins, MBA, CFP® Director of Financial Planning
*Disclosure Regarding Financial Planning Services. Churchill provides financial planning services to clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing and may include discussions of a client’s tax, insurance, employee benefits, estate planning, and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax or accounting advice, and the client must rely on legal, insurance and accounting professionals for that advice and documentation. No guarantee can be made as to increasing returns to an investment portfolio as a result of financial planning.
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