I want to highlight an investment plan that is often overlooked and underappreciated, the Roth IRA. The Roth IRA went into effect in 1998 thanks to the hard work of the late Senator William Roth. He felt that Americans needed more incentive to save money for their long term retirement goals. The traditional IRA was created in the 70's but had several drawbacks that were addressed when the Roth was created. If you are a young couple beginning to build a life plan or an individual starting a career, earning less than $114,000, or $181,000 if married, then you can contribute $5,500 per year to your Roth IRA (or $6,500 if over age 50). If you qualify for the Roth IRA, consider yourself lucky and open one immediately. Here are four reasons why:
1. All of the earnings on a Roth IRA are TAX FREE at the time of withdrawal. This is a huge advantage over any other retirement plan. Most retirement plans allow you to save and grow tax deferred, but when you take the money out of the account, you are taxed at ordinary income rates. Being able to withdraw funds tax free means that each dollar you earn is actually worth a lot more, depending on your tax rate. For people in California, federal and state taxes can add up. To be able to control and limit your taxes is a huge advantage when saving and planning for retirement.
2. The Roth IRA has no 70.5 age rule. Traditional IRAs and tax deferred retirement plans like 401ks require you to begin taking mandatory withdrawals at age 70.5. Seventy isn't old anymore if you live to 100. I have many clients who are forced to take mandatory withdrawals from their retirement plans and pay taxes whether they need the money or not. Every year, like clockwork, I have clients who must withdraw their mandatory funds and pay taxes on the amount withdrawn only to reinvest it. This regulation forces people to pay higher or unexpected taxes. There is no such problem with the Roth IRA. It has no mandatory withdrawals because the money is all tax free. It is a great deal - especially if you plan on living to 100!
3. The Roth IRA can be passed on to your heirs TAX FREE. Even worse than the 70.5 rule is dying with a traditional IRA. The government is going to collect its tax money, whether you use the IRA while alive or after you die. When someone dies with an IRA the government forces you to take withdrawals as well as possibly paying estate taxes* as well. This can be a nightmare as distributions often can be at a high tax rate and force your other income into a higher tax bracket. The Roth IRA has no such problem. You can pass the Roth IRA to your heirs TAX FREE. You never lose the TAX FREE element once you have it so when you pass, your children will receive a tax free asset that they can hold and use as they wish.
4. We recommend a Roth for retirement savings, but the funds are not limited to retirement needs. The Roth can be used for several things, like a first time home purchase, or education expenses. The Roth is also funded with after tax money, which gives you liquidity since you can withdraw the principal you put in without a penalty or taxes, if needed. You are not "locking up" your money with a Roth IRA since the principal can always be accessed.
If you qualify for a Roth IRA, it should be a part of your financial plan. The overlooked and underappreciated Roth IRA is one of the most important elements for planning a successful retirement. With a Roth IRA and wise advice from a Gerber Kawasaki advisor, you can build the life you deserve and the retirement you want.
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405
Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.
*You may designate one or more beneficiaries to recieve your traditional IRA after your death. If your spouse is your beneficiary, he or she may directly transfer your traditional IRA to his or her own IRA tax-free. In addition, all beneficiaries have the option of taking a lump-sum payment or periodic payments over a number of years. Any tax-deferred money in your traditional IRA at the time of death will be taxed when it is distributed to your beneficiaries. If you withdraw any ROTH IRA investment gains prior to age 59 1/2, then you'll owe income taxes and a 10% early withdrawl penalty on those funds.