Why You Should Consider a Roth at Any Age

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It is typical for people to turn to “common wisdom” when looking for answers to major decisions about money. But this is a mistake because each financial situation is unique. You cannot maximize the success of a financial plan by simply following rules of thumb.

One such rule I frequently hear, purports to simplify the usefulness of a Roth to: it only makes sense if you are young. Rules of thumb like this make Certified Financial Planner™ professionals like me cringe.

Successfully navigating the complexities of our financial system depends on how well you know your players and how creative you can be in your strategy. When used properly, a Roth IRA, Roth 401(k) and Roth conversions can be the queen in your financial chess game, at any age.

So, what makes the Roth so special? 

Tax-Free Growth

While after-tax monies are used to fund Roth contributions, earnings grow tax-free. The longer the investment time horizon one has, the greater the potential for tax-free appreciation, which is why it is commonly considered a tool only for the young.

Do not forget, however, that even a retiree may have a time horizon of thirty years or longer during which their money needs to be working for them. As such, the Roth should not be so readily dismissed simply because of age.

Tax-free growth is outstanding. But it’s the planning opportunities which are available to you when you have a pot of money, which isn’t subject to any taxation, that makes this kind of savings so useful.

Financial Planning Opportunities and Flexibility

Having money saved in a Roth affords you the flexibility to control, to some extent, your tax burden from year to year. Let’s presume that you would like to withdraw $80,000/yr. from your retirement assets to maintain your present standard of living.

If all this money has been saved in the Traditional IRA or Traditional 401(k) environment your $80,000 withdrawal will be 100% taxable as though you had earned it in that year.

If, however, you have money saved in the Roth, you could, for instance, take $40,000 from the Traditional environment and $40,000 from the Roth environment and only pay income tax on $40,000.

Alternatively, you could take the whole $80,000 from the Roth, paying no tax, or take a disproportionate percentage from each. The point is that you have provided yourself with options. This is where the value of the Roth IRA is most apparent—in the flexibility it offers you.

No Required Minimum Distributions (RMD)

Additionally, there are no Required Minimum Distributions (except Roth 401(k)s). Your Traditional IRAs, including those that have rolled over from your 401(k)s, are subject to the RMD rules. When you turn 72, a calculation will be made that takes the prior years ending account balance and divides it by your life expectancy. You have to pay ordinary income tax on these amounts which is exceedingly annoying if you don’t need the money.

In the Roth IRA environment, you are not required to take out any amount. There is no RMD during your life, so there is no forced taxation on these amounts.

Furthermore, by contributing to the Roth, the balances in the traditional environment will likely be lower. This in turn reduces the total RMD, and subsequently reduces the total tax owed during those years.

Continued Tax-Free Growth to Beneficiaries

The tax-free growth is cross generational. Any remaining assets in a Roth are transferred to your beneficiaries, and presuming they leave it in the Roth, they can continue benefiting from its tax-free growth. However, they will have an RMD, but those amounts will still be tax-free.

Avoiding a Tax Spiral

Presume you enter retirement having saved every penny in Traditional IRAs and Traditional 401(k)s. Assume again that you require $80,000/yr. from these accounts for ordinary living expenses but have to withdraw $93,000 to cover the tax for the $80,000.

Taking $93,000 incurs an additional $3,000 (approximately) in taxes which increases the following year’s withdrawal to $96,000… and the spiral continues. You end up paying tax on money withdrawn just to pay tax.

Even more frustrating is when you want or in fact need to withdraw additional large amounts of money for a large expense like a new car, a large debt payment, a new roof or a vacation. In these situations, the tax spiral can be stifling.

Having Roth money not subject to taxation is very welcome in situations like this.

As you can see, there are many issues to consider beyond one’s age when analyzing the benefits of the Roth. Financial planning opportunities such as the ones I have outlined above cannot be ignored when considering the Roth for people of any age. It may not make sense in every financial situation, but it is certainly worthy of strong consideration.

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