Looking at the ROTH IRA for Retirement and Estate Planning


Maurice StouseBy Maurice Stouse, Branch Manager and Financial Advisor

When it comes to taxes and investing there are three ways that an investor might benefit: Tax deferral, tax deductible and tax-free investing. This article addresses tax free investing with focus on the Roth IRA in particular.

First a recap of the other two. Tax deferred investing is best exemplified with retirement plans like 401ks, 403bs, IRAs and defined benefit (or pension) plans. These may also include some tax reduction in that the contributions are being made with pretax dollars.
Taxes are deferred and are not due on money in these types of accounts until withdrawals are made. For pure tax-deductible benefits, consider that charitable giving (either directly or through a donor advised fund) might reduce income taxes if that can be itemized.

So, what about tax free investing? The ROTH IRA allows for contributions and future withdrawals to be tax free (there are some restrictions for those under 59.5 years old however). This is growing in popularity, because many investors and savers are finding it to be an option for retirement planning and saving and for planning for their estates (what they leave behind) as well.

The ROTH IRA however is not available to everybody. There are earnings tests that must be met and in some cases the wage earner might be in too high a bracket to be able to tax advantage of the Roth. For those that can, however, consider the following:

1. $6000 dollars a year can be contributed for each tax year. If you are over 50, you can add $1000 as a catch-up contribution effectively making it $7000.
2. There is no required minimum distribution during your lifetime. If you make qualified withdrawals, those are tax free. The rules for beneficiaries are different than those beneficiaries who are spouses, however, regarding future tax-free withdrawals.
3. Contributions can be taken out at any time. However, earnings are subject to a minimum five-year rule and need to be taken after age 59 ½ to be free from penalties.
• For more information, you can review details at IRS.gov and its publication 590 or see a qualified tax professional.

Many investors are also looking at converting existing IRAs (or Rollover IRAs that were originally 401ks as an example) into ROTHs now. Why might they be doing that? They might want to pay the taxes now (a conversion means that the amount being converted that year would be included in taxable income) and, therefore, as a ROTH, its future growth or earnings (and withdrawals) becomes tax free. They may be thinking that taxes might be higher in the future. This has taken on increased awareness with current federal deficits, the size of the national debt and future interest on the debt. Originally, a future retiree might be thinking they would be in a lower tax bracket at retirement. Lastly, they might want as much retirement income as possible to be free from income taxes.

There are other ways to invest tax free. The first of these is municipal bonds. That interest is federally tax free. If someone is in a state that has an income tax (Florida of course does not), bonds issued in that state would be federally and state tax free. One thing that retirees should take note of is that municipal interest is considered when computing how much of their Social Security benefits are taxable. In addition, municipal bonds may subject their owners to the alternative minimum tax and might not be suitable for all investors. Lastly would be utilizing cash value or so-called permanent life insurance. The cash that accumulates on those is not taxed nor is it counted regarding Social Security benefits. When using life insurance, it’s important to consider whether there is an underlying need for the insurance to begin with.

Find out more about the importance of investing utilizing tax advantaged strategies. Visit with an advisor (Financial as well as tax) or conduct your own research to learn more.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management and Raymond James and he resides in Grayton Beach. He has been in financial services for over 33 years. His main office is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32451. Branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City, Pensacola, Tallahassee, and Moultrie, GA. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management First Florida Bank, and The First, A National Banking Association are not registered broker/dealers and are independent of Raymond James Financial Services. Views expressed are the current opinion of the author, not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Investors should consult their investment professional prior to making an investment decision. Please note, changes in tax law may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax matters. You should discuss tax or legal matters with the appropriate professional.