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Should I open a Roth IRA in my 50’s? Probably, here’s why…

July 14, 2023

Roth IRAs are incredible tools for young people.  Pay tax now and then in retirement have completely *tax free income from that account after decades of growth, it’s an incredible opportunity. 

 

However, people sometimes waffle on the Roth IRA’s utility as they approach retirement.  “Why bother?”, some ask.  “I’m at my peak career earnings and in retirement I’ll pay less tax.  The account won’t have that long to grow anyway.” These are valid points and each circumstance needs to be analyzed individually.  However, having some Roth funds available can save you from unexpected tax consequences.

 

Picture this, the Smiths, both 69, have spent the last four years living and traveling comfortably on $150,000 of retirement income from social security and two pensions.  They also have a traditional IRA that they have yet to use.  With this steady lifestyle, the Smiths know they will be in the 22% tax bracket and that they will pay the minimum Medicare Part-B premiums.

 

Then, their shared vehicle, the pickup that hauls their camper, needs to be replaced.  Even with a trade-in they are still looking at $50,000 for a truck that meets their travel needs.  It was always their ambition to retire debt-free, so they commit to purchase the vehicle with cash.  “No problem, that’s why we have the IRA”, they agree.  However, when tax time arrives their accountant informs them that not only are they in a new tax bracket, but that they will now have higher Medicare part-B premiums.

 

Are either of these the end of the world, of course not, but had the Smiths had even part of the funds available in a Roth IRA, they could have maintained both their tax bracket and their Medicare Part-B premiums.  Had they had the entire $50,000 in Roth funds, it would have meant zero change to their tax situation.  That is where the Roth IRA shines brightly, as an ace-up-your-sleeve when all your other income options are taxed as ordinary income.

 

So, even if you are in your mid-50s, please give us a call and we can determine your eligibility for making Roth IRA contributions and determine if this tool might be a valuable addition to your retirement income tool belt.

 

All the best,

 

Cam

 

 

(a)*Tax Free: Income may be subject to local, state and/or the alternative minimum tax.

 

(b) *Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

 

(c) Hypothetical illustrations: These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.