ROTH


ROTH IRA

If you are eligible to contribute to a Roth IRA, it is likely you should do it, whether it is contributing to an existing one or opening a new one. Contributions into it are after-tax, but they then accumulate tax free. There are no RMDs and all distributions are also tax free. If we are older than 59.5, than a Roth IRA is a great source of tax-free liquidity. And, now like a regular IRA, there are no age restrictions for contributing to a Roth IRA. In an era of escalating taxes, this is a “go-to” vehicle.

However, eligibility for a Roth IRA can be problematic for retirees, as contributions to a Roth IRA can only be done with earned income – i.e. income from employment.  And, regular Roth IRA contribution limitations are the lesser of (a) $7,000 (assuming we are over age 50) and (b) our total annual employment income. And, if by chance we were to earn more than $137,000 annually ($203,000 if married and filing jointly).

You can convert a regular IRA to a Roth IRA with no income requirements or age restrictions.  It is called a Backdoor Roth IRA.  But it does have one requirement: 100% of the regular IRA must be converted, which means we cannot do a “partial” Backdoor Roth IRA. The significance of this, of course, is that 100% of the regular IRA must be declared as taxable income upon conversion. The government will not let us do a little bit at a time.   

A “leftover” Roth IRA can also be a valuable inheritance, but it can only be passed to a beneficiary as a “Beneficiary Roth IRA” if it has been held for at least 5 years. But if it qualifies, the beneficiary will continue to enjoy the tax-free accumulation and distribution advantages.  However, a beneficiary must distribute 100% of the inherited amount within 10 years of the inheritance. The only exception would be if it is transferred in the form of a lifetime annuity, which would be purchased from an insurance company using the Roth IRA proceeds and disbursed to the annuitant (the Roth IRA beneficiary) only in fixed periodic amounts over the annuitant’s remaining lifetime. 

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