Since the Roth option first came into existence in 1997, savers have placed more than $4 trillion into the retirement accounts that offer no up-front tax deduction but do allow for tax-free withdrawals after retirement. Of course, there are other ways that people add to their retirement nest eggs.
Inheritances, borrowing against real estate equity, liquidation of assets and sale of life insurance policies for less-than-maturity value are just a few. In fact, people who have life insurance policies in place often consult with professionals to take and in-depth look at a life settlement. That way, they can see how much they might get when selling a policy before it matures.
When it comes to IRAs (individual retirement arrangements/accounts), there are two ways to go: traditional and Roth. Traditional plans allow for immediate tax deductions up to a specified amount but offer a possible lower tax rate on withdrawals after retirement. That’s because most people are in lower tax brackets after they stop working. Roth IRAs don’t offer any immediate tax advantage or deduction. Deposits are made with after-tax dollars. But when it comes time to withdraw the money, no tax has to be paid on the amounts taken out. In almost all situations, it’s wise for consumers to use this type of IRA rather than traditional plans.
You Can Still Contribute After You Turn 70.5 Years Old
One of the big drawbacks of traditional IRAs are the many restrictions on withdrawals and contributions. With a Roth, taxpayers can continue to put money into the account even after they turn 70-and-a-half. As long as you have “earned income,” you can contribute, no matter your age. There are no mandatory withdrawal ages either, as is the case with traditional plans. Now that more people are continuing to work after age 71, that means this form of an IRA are even more attractive for those who want a financially secure retirement.
Roth’s are Extremely Flexible
In addition to allowing contributions at any age, Roth IRAs are flexible in other ways. For example, you can withdraw your contributions at any time with no tax penalty. After age 59.5, you can even withdraw the interest earned on those contributions. The main advantage is that taxpayers have access to most of the funds any time they need it, tax-free.
Your Retirement Withdrawals are Tax-Free
The biggest selling point of a Roth IRA is its ability to provide tax-free withdrawals for retirees. There’s no need to calculate your current tax rate or hope that you’ll be in a lower tax bracket after you retire. The setup is simple and attractive for seniors who want to enjoy their money without ever worrying about tax hassles.
Most Anyone Can Use Regardless of Income
The so-called “back door” option allows wealthy individuals to open Roth IRAs. It’s best to work with your accountant when going this route, but the bottom line is that you can make a large, non-tax-deductible deposit into a regular IRA and then convert that account later on. It’s legal, simple and a smart way to get into, even if your income is high.