Everything You Need to Know About Roth IRAs

Here at Stonepath Wealth Management, we’ve long espoused the value of Roth IRAs—and thanks to the recent tax reform bill, they’re arguably as useful now as ever before.

In this post, we’re going to share everything you need to know about Roths—and about Roth conversions—in light of the new tax legislation.

Understanding the Advantages of Roth IRAs

First, let’s briefly review the primary benefits of these individual retirement accounts.

  1. Unlike with traditional IRAs, qualified Roth withdrawals are tax-exempt. And when we say “qualified,” we just mean that you’ve had the IRA for at least five years and are at least 59½ years old.
  2. Additionally, and also unlike with traditional IRAs, Roth IRAs don’t require you to start taking minimum distributions once you reach a certain age. You don’t have to touch that money until you really want to.

Contributing to a Roth IRA

Making annual contributions to a Roth IRA is a logical thing to do if you believe you’ll face higher taxes when you’re in retirement—either because tax laws change or because you move into a higher tax bracket.

There is a downside, though—namely, you don’t get to take a tax deduction for your Roth contributions.

Also note that there is a maximum amount you’re able to contribute to your Roth IRA each year—and it’s the lesser of these two sums:

  1. You earned annual income; or
  2. The annual contribution limit for the year.

This year, the annual contribution limit is either $5,500 or—if you’ll be 50 by year’s end– $6,500.

Also be aware that—unlike with a traditional IRA, where you can’t make any more contributions once you turn 70½—you’re never phased out of Roth contributions, just so long as you meet the guidelines noted above.

What About Conversions?

Something else to consider: The single quickest way to get a large sum of money into your Roth IRA is by taking your traditional account and converting it into a Roth. This is treated as a taxable distribution from your traditional account, which can cause a one-time spike in your federal income taxes—but because today’s federal income tax rates are so low (thanks to recent tax reform), this is probably an ideal time to make that conversion.

The bottom line? Even if you already have a traditional IRA, there may be wisdom in converting it into a Roth—and if that’s something you’ve thought about, now could be the right time to act.

We’d love to talk with you more about the pros and cons of opening a Roth IRA; about the process of converting a traditional account into a Roth; and about the timing of doing any of this now.

To learn more, reach out to Stonepath Wealth Management today, and schedule a one-on-one chat with one of our advisors.