Tax Free Growth Strategy

The Tax Cuts and Jobs Act (TCJA), passed in December 2017 introduced several provisions to help lower indiviual income taxes. The provisions in  TCJA are set to start sunsetting in 2025.  How do you protect yourself against rising Federal Income Tax rates in the future?

Consider allocating funds to a Roth IRA to better position yourself for minimizing federal income taxation in the future. 

What is a Roth IRA?

A Roth IRA is an individual retirement account in which money grows tax-free and retirement withdrawals are tax-free. In 2020 the contribution limit is up to $6,000 ($7,000 if 50 or older) for modified adjusted gross incomes below $139,000 (single filers) or $206,000 (married filing jointly).

In 2021 the contribution limit is up to $6,000 ($7,000 if 50 or older) for modified adjusted gross incomes below $140,000 (single filers) or $208,000 (married filing jointly).

Who is eligible for a Roth IRA?

Here are the basic rules and qualifications.

  • You have to have earned income. You must have income from work (the IRS term is "taxable compensation"). The max you can contribute to a Roth in a year is your income from work or $6,000 ($7,000 if you're age 50 or older), whichever is less. You may also be eligible for an IRA rollover.

Understanding Roth IRAs: 5 key characteristics

A Roth IRA is an individual retirement account in which money grows tax-free and withdrawals in retirement are tax-free. Here are the five key characteristics of a Roth IRA.

    1. You pay taxes on money you put in the account. You cannot deduct the contributions on your taxes.
    2. In 2020 and 2021 you can contribute up to $6,000 ($7,000 if you're 50 or older).
    3. You cannot contribute to a Roth IRA if your modified adjusted gross income (MAGI) is more than $139,000 in 2020 (single filers) or $206,000 (married filing jointly). (The backdoor Roth strategy offers a workaround.) In 2021 the contribution limit is up to $6,000 ($7,000 if 50 or older) for modified adjusted gross incomes below $140,000 (single filers) or $208,000 (married filing jointly).  
    4. People at least 59½ years old and who hold their accounts for at least five years can take distributions, including earnings, without paying federal taxes.
    5. You don't have to take any money out of your Roth IRA if you don't want to. There are no required minimum distributions (RMDs).

 

Advantages and benefits of Roth IRAs

    • Potential tax savings. If you expect your tax rate to be higher in the future, Roth IRAs may be worth it because you contribute money now that you'll pay income taxes on this year rather than in the future when your tax rate is higher. If your tax rate is lower now, it makes sense to pay taxes now in return for tax-free retirement withdrawals.
    • Easy withdrawals. You can withdraw the money you contributed any time, without taxes or penalty. (You may be taxed or penalized if you withdraw investment earnings.)
    • Double dipping. You can contribute to a Roth in addition to employer sponsored plans like a 403(b), 457 or 401(k). In 2020, the Roth limit is $6,000 per year ($7,000 if you're 50 or older).
    • Flexible timing. You can choose when and how much you contribute to a Roth IRA. For example, you could contribute $6,000 on the first day of the year, or split up your contributions over many months.
    • Extra time to contribute. You have until the tax deadline to contribute for the previous calendar year.
    • Tax-free distributions. Once you hit 59½ and have held the account for at least five years, you can take distributions, including earnings, from a Roth IRA without paying federal taxes.
    • No age limit to open. You can open a Roth IRA at any age, as long as you have earned income (you can't contribute more than your earned income).
    • No RMDs. Roth IRAs aren't subject to the required minimum distributions required from a traditional IRA, 403(b), 457 or 401(k) starting at age 72 (in 2019 and earlier years, that age was 70½).

     

    Find out if this strategy makes sense for you. Schedule a complimentary, no obligation phone, virtual or office meeting by calling (954) 340-1588. You may also schedule a phone meeting by clicking here.