Education | Feb 12, 2019
From A Tax Perspective, A Roth IRA Can Be A Young Professional Investor’s Best Friend
Adam M. SouplyCFA®, CPFA®, AIF®, MBA
CFA®, CPFA®, AIF®, MBA
The Roth IRA is an excellent retirement savings tool for young professionals. It provides benefits from a tax perspective and via compounding growth. With a Roth IRA, you can contribute up to $5,500 after-tax dollars for tax year 2018 (you still have until April 15th of 2019) and up to $6,000 for tax year 2019. Your investments have the ability to grow tax-free and be withdrawn tax-free after the age of 59 ½. Contributions made to a Roth IRA can be withdrawn anytime tax- and penalty-free.
The Roth IRA does have income limits. In 2018, if you earned more than $135,000 (single filer) or $199,000 (married joint filer), you are ineligible to contribute to a Roth IRA. For 2019, those limits are $137,000 (single filer) and $203,000 (married joint filer). There is a phase out for Roth IRA contributions too: 2018 and 2019. Even if your income level is above the maximum amounts, there is another solution via a backdoor Roth IRA.
From a tax perspective, most likely you are in a lower tax bracket than what you expect to be in the future. By contributing when you are in a lower tax bracket, you are locking in a lower tax rate today with your contributions. On the other hand, if you contribute to a Traditional IRA (where you invest pre-tax dollars), withdrawals will be taxed presumably at a higher tax rate later in retirement.
To connect the idea of compounding, consider a hypothetical example of contributing $6,000 per year for 30 years and earning a 7% return. At the end of 30 years, you could have $566,765 in your retirement account. If your spouse establishes an account too, that could equate to over $1 million dollars!
There are other benefits of utilizing the Roth IRA. You are never required to withdraw money with a Roth IRA. A Traditional IRA, on the other hand, has a required minimum distribution that begins when you turn 70 ½. Also, when you reach age 50, you qualify to contribute an extra $1,000 in contributions, adding to the power of compounding.
Time is on your side; don’t waste it!
To find out if a Roth IRA is the right retirement vehicle for you, contact your DBR Next financial advisor at DBR & Co.
This material has been provided for general, informational purposes only, represents only a summary of the topics discussed, and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice or recommendations. Rather, they simply reflect the opinions and views of the author. D. B. Root & Company, LLC. does not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation. There can be no assurance that any particular strategy or investment will prove profitable. This document contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information derived from such sources, and take no responsibility therefore. This document contains certain forward-looking statements signaled by words such as "anticipate," "expect", or "believe" that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that the expectations, beliefs, views and opinions expressed in this document will come to pass. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
Adam M. Souply
CFA®, CPFA®, AIF®, MBA