Roth IRA basics

Retirement Savings: Consider a Roth IRA

A Roth individual retirement account is a brilliant way to save for retirement. Much like a traditional IRA, a Roth IRA allows you to invest and for it to grow tax-free. One great advantage this type of account has is that it also lets you take tax-free withdrawals of your contributions at any age. Your earnings may have the same benefit under certain circumstances. For your earning to be withdrawn tax-free you must be:

  • 59 ½ years old
  • Disabled
  • Using the funds as first-time

Naturally, like any tax-advantaged retirement account, the IRS has stipulations and rules that cover contribution limits, income limits, and withdrawals.

Roth IRA Eligibility

The first requirement for contributing to a Roth IRA is having earned income. This could be from the income earned from working for someone else (commissions, tips, bonuses count). Secondly, this earned income could be from a self-operated business or other means of earned income such as tax alimony or even combat pay.

Earned income that does not count:

  • Rental properties
  • Nontaxable alimony
  • Child support
  • SS benefits
  • Unemployment benefits

On a plus side, there is no age limit for making Roth IRA contributions. From a teen working a summer job to someone even in their 80s can contribute. Note: someone under 18 would need to set up a custodial account.

If you are contributing towards another qualified retirement plan you are still eligible to contribute towards a Roth IRA. So, if you earn money and meet the limitations, you can contribute towards your own Roth IRA and your employer-sponsored 401(k) plan.

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How to Face Your Retirement Risks: Think in Buckets

Since the old paradigm of retirement will do more harm than good in this current world, tackling the Top Ten Risks can be tricky.

Why won’t the old paradigm work? The first reason is folks nowadays live into their 80s when decades back that was not as common. Because retirement age back in the late 20th century was 55, many retirees waited until years past their retirement age to fully leave the workforce. Another major contributor to retirement plans back then were pensions. Social Security (SS) was on the table then, too. Folks could easily retire and enjoy their golden years off their employment pension and SS. Now, a lot of retirement is unfortunately up to the employees.

Beyond understanding SS and Medicare, balancing your assets over taxable, tax-deferred, and tax-free accounts is key to the success of your risk-free retirement. This is known as the Three Bucket System.

First and foremost, the taxable bucket is designed for emergency funds. Having 6 months of your living expenses in this bucket permits less risk. You are protected in case of emergency, and you are not exposing your savings to extra taxation.

The second bucket is tax-deferred and is a bucket folks overfill. While this bucket varies individually, there are some ‘rules’ to be mindful of. Your required minimum distributions (RMDs) should be low enough to not create provisional income (too much would cause your SS to be taxed). Secondly, you do not want them to exceed your standard deduction.

Filling the other two buckets means you can successfully begin filling the third bucket up: tax-free. The sooner you do this, the better off your risk-free retirement will do. Things that can be done for this bucket are Roth conversions or buying a life insurance retirement plan.

**We strongly encourage you to listen to our podcast Retirement Risk Show episode “Break Down the Top 10 Risks Facing Your Retirement” for a deeper dive into the information provided in this blog. For even more on the 10 Risks Top Ten Risks and strategies to reduce them during retirement, register for our webinar “Getting Safely Through Retirement.”

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