Countdown to Roth IRA Contribution Day

5 Months to go! The Roth IRA deadline for your 2013 contribution is just 5 months away.  Today I will cover rules for regular and Roth IRAs which will highlight why I am crazy about Roth IRAs.

Retirement Withdrawal Rules

I know.  You may not have opened or added anything to your IRA and I am already talking withdrawing the money?  Well, you need to understand how you will use this money in the future.  Otherwise you would be jumping in without a full understanding of why this is the single best wealth creation tool for you and your heirs (No heirs yet?  No worries. Your future heirs will thank you)

Poof – you’re retired and the world still works on money.  Hopefully you have social security, maybe a 401(k) or 403(b) from your job or you have rolled everything into a regular IRA.  Maybe you even have a pension which sends you money every month.  The common theme?  You pay taxes on all these retirement sources of income.

You see, you got a tax break on the contributions to those accounts.  Now, when you take it out in retirement you have to pay taxes.

Roth Advantage – You never have to pay taxes when you withdraw money in a Roth IRA in retirement.  You funded the account with money you had after paying taxes.  Pretty Sweet!

Forced Withdrawals

Regular IRAs have rules to follow once you are 70.5 years old.  First, you have to start taking money out of the account.  Second, the federal government tells you how much to take out every year for the rest of your life.  If you do not follow the rules you have to pay a 50% fine.  Ouch.

Most of us will want to take money out once we make it to 70.5,  but what if you have a job you like, or what if you have to keep working to make ends meet?  Too bad – you have to start dipping into your retirement nest egg whether or not you need the cash.

With a Roth IRA there are no forced withdrawals.  In fact, you never have to take any money out of your Roth IRA.  It can keep growing and growing as you age.

Rules for your heirs

Now you know I have flipped out since I am talking about your heirs and you may not have any kids.  Bear with me here. Your heirs have to follow the same rules.  Once they inherit the IRA account they are forced to withdraw an amount every year (not when they turn 70.5).  They could withdraw the whole amount in the account, but they would pay income taxes on the money they pull out.

For Roth IRAs there are no rules.  Your heirs can take all the money out tax free, or let it grow. That means your Roth IRA could be your kid’s retirement fund.  Just think about that.  If you are 30, you can put money in a Roth IRA that can grow over you and your heirs’ lifetimes.  What would your Roth IRA balance look like in 70 years?

 

Tax free withdrawals. Full control of withdrawals.  No impact to heirs.  Do you see now why I love Roth IRAs?  There is no better wealth creation tool.

Next month we will cover the rules for tapping into your Regular and Roth IRAs before you retire.  It is allowed, but not encouraged. Keep saving and keep learning as we approach April 15th 2014, the last day you can open or fund a Roth IRA for 2013.