Saving for Your Retirement: Roth IRAs

A Roth Individual Retirement Account (IRA) is a personal savings plan that offers tax benefits to encourage retirement savings. You can contribute up to the lesser of $5,500 in 2016 (unchanged from 2015), or 100 percent of your taxable compensation to a Roth IRA. In addition, individuals age 50 or older can make an extra “catch-up” contribution of up to $1,000 in 2016 and 2017. Contributions to a Roth IRA are not tax deductible, but the funds grow tax-deferred and distributions are tax-free under certain conditions.

Prerequisites

  • You have taxable compensation (i.e., wages, self-employment income) during the year of the contribution
  • Your modified adjusted gross income (MAGI) (for 2016) must be:
    1. $117,000 or less for a full contribution if your tax filing status is single or head of household (partial contribution allowed, up to MAGI of $132,000)
    2. $184,000 or less for a full contribution if your tax filing status is married filing jointly or qualifying widow(er) (partial contribution allowed, up to MAGI of $194,000)
    3. $10,000 or less for a partial contribution if your tax filing status is married filing separately and you lived with your spouse at any time during the year (full contribution not allowed)

Note: These income ranges are for the 2016 tax year, and are indexed for inflation.

Key strengths

  • Qualified distributions are completely tax-free (and tax penalty-free)
  • You can contribute after age 70½ (as long as you have taxable compensation)
  • You have flexibility in withdrawing your funds prior to retirement
  • You are not required to take any distributions while you are alive
  • Contributions can be made even if you are covered by an employer-sponsored retirement plan
  • IRAs offer a wide range of investment choices
  • $1,283,025 (as of April 1, 2016) (and in some cases more) of IRA assets are protected in the event of bankruptcy under federal law

Key tradeoffs

  • You receive no tax deduction when you make a contribution
  • If a withdrawal does not qualify for tax-free status, the portion that represents earnings is subject to federal income tax (and perhaps an early withdrawal penalty if under age 59½)
  • Special penalty provisions may apply to withdrawals of Roth IRA funds that were converted or rolled over from a Traditional IRA, SEP IRA, or SIMPLE IRA
  • There is always the possibility that the law will change in the future

Variations from state to state

  • States vary in their protection of Roth IRAs from creditors
  • States may differ in their tax treatment of Roth IRAs

How is it implemented?

  • Open a Roth IRA with a bank, financial institution, mutual fund company, life insurance company or stockbroker
  • Select types of investments to fund the Roth IRA (e.g., CDs, mutual funds, annuities)
  • Make contributions up to the due date of your federal income tax return for that year (usually April 15 of the following year), not including extensions

Investing for Retirement

Keep in mind…

  • A well-diversified portfolio can help balance risk
  • The earlier you start investing, the more you can contribute over the course of your working lifetime
  • By starting early, your investments will have a longer period of time to compound
  • With a longer time frame, you will have a larger choice of investment possibilities

What to do…

  • Assess your risk tolerance
  • Determine your investing time frame
  • Determine the amount of money you can invest
  • Choose investments that are appropriate for your risk tolerance and time horizon
  • Seek professional management, if necessary

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Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA/SIPC. Infinex and the bank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value. NOT FDIC-INSURED. NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY. NOT GUARANTEED BY THE BANK. MAY GO DOWN IN VALUE.

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