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 Your investments have the ability to grow tax-free and be withdrawn tax-free after the age of 59 ½. Contributions made to a Roth IRA can be withdrawn anytime tax- and penalty-free.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.
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Adam M. Souply
CFA®, CPFA®, AIF®, MBA