Our Adventures with a Roth IRA

A little less than a year ago, my wife landed a position with a wealth management department of a large bank.  It took awhile, but finally their compliance department said we could not keep my 15-year-old daughter’s Custodial Roth IRA at its then current custodian.  We would have to move it to their custodian.  So I contact that financial company.

Now we are talking about less than $500 in the account (Time value of money,  little deposits over time will grow into a huge amount!).

The company that her compliance department required me to move the account to cannot accommodate a custodial Roth IRA.  The other part of that broker dealer can, but my daughter’s balance is WELL below their $250K minimum balance requirement.

So I begin to hunt for a bank who can open this account, just sock it away in a money market account IRA until she is 18.  Don’t like missing the potential growth of a mutual  fund investment, but it is what it is.

Well, after having conversations with 6-7 banks, both local and national, not one of them could open this type of account.  One even offered to open the IRA in her name, I could make deposits to it, but NO ONE could make withdrawals or close the account until my daughter reached 18!

Wow.  See, because my daughter is under the age of 18, she cannot sign agreements like an IRA agreement.  So, a custodian (like Dad) is the signer, acting on her behalf, but the custodian has no ownership in the account.  Simple, but beyond the ability of most banks to do.

A Roth IRA can be opened by or for ANYONE with an earned income, even if they are an infant (baby in a commercial?  Just drop that $5K commission check into a custodial Roth IRA earning 8% for the next 60 years and it grows to almost $600,000.00 tax free)!

For the time being, my daughter’s Roth IRA was moved out of the protective umbrella of Roth and into a minor savings account.  She is working one day a week, and we are tossing HALF of her pay into this retirement account.  She won’t even have the maximum (currently $5500) annual investment limit when she turns 18, but starting her out so she lives on half her income can turn her into an early retirement superstar!

Stay tuned!

Be Rich in Your Life

Your life will be a success once you realize that it is the people and experiences in your life that make you rich, and not how much stuff you have. You can’t drive that leased car on your deathbed, but you will surely remember all the people you love and who loved you, and the things you did together. Live BELOW your means, get our of debt ASAP, and invest all you can (some folks are able to tweak their lives so well that they invest 40-50% of their income every year!

Roth IRAs, Part II

Roth IRAs, Part II

There is a lot to learn about Roth IRAs, and we are covering the main points in these two articles. When you decide to open one of these accounts, please seek out professional advice, and also seek out a tax professional for those type of questions. What we write here is correct to our best knowledge as of July 2014, but tax laws can change, so consult a tax expert.

That disclaimer out of the way, it’s on to Part II!

We have not talked about contribution limits, and distribution rules, so let’s jump in the pool, OK?

Any money going into IRAs, Traditional or Roth has to come from earned income. If you get your income from interest, dividends, or other unearned pay, these retirement accounts are beyond your reach.

For folks with earned income, as of the 2014 tax year you can invest $5500 a year into a Roth IRA, $6500 if you are over 50 years of age. Using a monthly cash flow plan (and you should), that would mean investing $458 or $541.66 per month. If you can’t do that much, that is certainly OK. There are investments out there that you can start for a little as $100.00 1. Get out of debt, 2. grab whatever free match money your employer is offering in your work retirement plan and then 3. open your Roth!

But Roth IRAs also have income limitations. If you make too much income, you can’t contribute to a Roth IRA.* The only IRA high income earners can contribute to is a non-deductible (after tax) Traditional IRA.

See the asterisk? It’s an important one for high income earners. We’ll talk about that asterisk VERY soon.

In 2014, the IRS limits your ability to contribute to a Roth as follows:

Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more.

Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.
*Here’s the asterisk explanation. High income earners can still have a Roth IRA! How? They first contribute to an after tax Traditional IRA, and then convert that IRA into a Roth IRA IMMEDIATLY!
There are no income rules affecting a person’s ability to convert a Traditional IRA into a Roth, you just have to pay taxes on whatever has not already been taxed. Well, if you just opened an after tax Traditional IRA and convert it right away before it has any growth, you can have a Roth with no tax or penalty. Financial folks call this a “back door Roth”.

OK, that’s the contribution part, putting the money in. Now, here are some of the important things to know about distributions!

First, money placed into a Roth to avoid taxes and possible tax penalties, must stay in a Roth until the later of age 59 ½ years of age OR at least 5 years after you open the account. There are exceptions to this rule, but in general, that’s what you need to know. Here’s how it works. If you open a Roth IRA when you are fifty, when you turn 59 ½, you can remove any or all of the money tax and penalty free, because you met both tests. Even if you made a contribution in your 59th year, your IRA is more than five years old, so no tax is due, even if you take out this year’s contribution!

The order of withdrawal is important to remember too. For tax purposes, distributions are considered to be coming from your contributions first, and earnings second. Because contributions are after tax, you won’t owe federal tax on them, just on the growth if the distribution does not meet the age tests or is being removed because of a qualifying exception.

Remember though, that Roth IRAs can always be contributed to with earned income (unless you are a super high incomer after age 70 ½ that is), as long as you live. And you can let it grow, grow grow tax free for as long as you want. Let the power of compound interest work for you, and grow your money tax free in a Roth IRA.

A final note: Much more detail can be found in IRS Publication 590 (link here is the 2013 version), consult a tax adviser for accurate tax advice and an investment adviser on where to invest your hard earned Roth contribution.

TTFN!

Roth IRAs, The Whats and Whys Part One

It’s June, and school is out or almost out for the summer.  Our thoughts turn to summer vacations, cold drinks and cooking outdoors. So what better time to talk about Roth IRAs?

Roth IRAs?  In June?  Aren’t Roth IRAs so April 15thy?  Why now?  Now, because NOW is the best, most perfect time to open your own Roth IRA!  Run, don’t walk to open a Roth IRA and here, you can learn the whys and hows of Roth IRAs today!

But wait,wait, wait.  I don’t even want to start talking about Roth IRAs until we cover some quick information about your company’s retirement plan.  If you work for a company (1) and they offer you a retirement plan (2) that you are eligible to participate (3), look here BEFORE dedicating money to a Roth IRA.  See if your company offers some of their money in a match for what you put into it.  If they match, please, please put enough into the company retirement plan to get that FREE MONEY the company match represents.  Enough said.

What’s in a name?  Just what is a Roth IRA?

A Roth IRA  is an Individual Retirement Account that you open yourself and you fund yourself.  It’s different in those ways from your company retirement plan, and it also differs from a Traditional IRA.

Differs how?

With a traditional IRA, you might be able to contribute pre-tax money.  Roth contributions are always after tax.

Traditional IRAs grow tax deferred; if you hold the money within the IRA until you are at least 59 1/2, you won’t pay any taxes until you take money out of the IRA.  Then, any money not taxed going in will be taxed per the tax rates in effect when you use the money.

The Roth IRA, if you hold it until you are 59 1/2 or five years from when you open the account, money taken out is free of federal taxes.  Yes, tax-free!  You see, your money went in after taxes, so that won’t be taxed again, but the growth in your account is not taxed either if you meet the five-year or 59 1/2 rule.

Traditional IRAs have an “end of the ball” bell that rings when you turn 70 1/2.  Two important changes happen at that point.  One, even if you are still working, you can no longer contribute to a traditional IRA.  Worse yet, whether you want the money or not, there is a Required Minimum Distribution rule that comes into play.  Using formulas (not going into them here), the IRS requires you to spend down your IRA until it is exhausted at age 100.  (This rule is also in place for 401K type accounts).

At 70 1/2 with a Roth IRA, neither of these things happen.  You can still contribute earned income to a Roth (as long as your income is not too high) AND THERE IS NO REQUIRED MINIMUM DISTRIBUTION EVER!

Well, I have bored you with this important information long enough.  Look for a Roth IRA Part Two, soon.  Happy Saving!!!!!

Oh, the smiling white guy in the middle of the post is Senator William Roth, the legislative sponsor of the bill creating the Roth IRA.