Obviously, my primary function in the lives of my clients is that I perform excellent planning for their tax and financial world, and make sure all the ships sail on time when it comes time to file things with the big ol' IRS.
All of which means that I get to dig into people's finances, from time to time -- and I'm always grateful for their trust and transparency when doing so.
So, while I often write about taxation, I take detours into other topics from time-to-time, as you may have gathered.
And, in that spirit, I'd like to introduce you to a friend of mine.
He has helped many of my clients and friends over the years, in versatile and useful ways.
You may even think you know him ... but perhaps not like I do.
Tony Khait, CPA, PFS's
"Real World" Personal Strategy Note
"May I Introduce You To Mr. Roth?"
Congress officially sanctioned Mr. Roth to assist savers way back in 1997. He was named after a real Mr. Roth, Senator Bill Roth, a Republican from Delaware. Since then, thousands of savers have taken advantage of his many talents in supporting their goals.
The first thing to understand about Mr. Roth is that he can put your investments where the IRS can never touch them again. That's quite a compelling feature when you consider Uncle Sam's obligation to pay for our nation's unhealthy debt habits.
Some decide to work with Mr. Roth because they expect their taxes to go up in the future. Others don't know what to anticipate, which is why they would prefer to go ahead and pay this tax liability now rather than play the wait-and-see game.
This tax-free growth feature of Mr. Roth is worth more than many investors estimate. Assume that for the last 30 years, you saved $5,000 annually in a taxable brokerage account, and I did the same with Mr. Roth. (I realize this scenario is only theoretical, because contributions limits were below $5,000 in prior years, and Roths have existed for less than two decades, but this is allowed now.)
Also assume that we both invested in the same Standard & Poor's 500 index. If we both withdrew the entire amount today, I would have $360,581 more than you after all taxes are paid.
As you can see, Mr. Roth is a good person to know.
Roth IRAs as an Emergency Reserve Account
Mr. Roth is not stingy. You can withdraw contributions, the money you give to Mr. Roth, at any time without incurring taxes.
If your account is worth $16,000 but you've only contributed $12,000, you can access this lesser amount with no strings attached. This makes the Roth a better place to put your
emergency savings than a regular certificate of deposit. Other retirement accounts can have big penalties if you withdraw early.
Mr. Roth is very generous during times of need. If you've had your account open for at least five years, you also may have penalty-free access to the earnings in certain medical situations. If you become disabled, all of the money, including earnings, is accessible and avoids taxes. Other medical emergencies allow you to avoid the 10% early withdrawal penalty, but not the taxes on the earnings.
In a pinch, you can have a distribution check from Mr. Roth in a few days' time. If you need it sooner, you could pay him a wire fee to have the money sent within hours. Although accessible, most investors avoid asking Mr. Roth to return their money unless it is a last resort. Accessibility but with a high psychological hurdle for withdrawals makes the best kind of emergency reserve option.
And tax-free saving for retirement is only one of the many talents Mr. Roth offers. Mr. Roth can also help with transferring gifts to your heirs, accessing restricted funds from other accounts, and paying for a new house or college expenses.
An inheritance vehicle
A Roth IRA inheritance can remain tax free for the entire life of the beneficiary, unlike a traditional IRA. Thus Roth IRAs are most powerful when young heirs inherit them. Grandparents can skip an entire generation of taxes by naming their grandchildren or great-grandchildren to inherit a Roth. Normally, a gift to someone 37.5 years younger than you, skipping a generation, incurs a tax.
Retirement accounts, owned by you or your child, are not counted at all in determining the Expected Family Contribution (EFC) for purposes of federal financial aid. This means that savings with Mr. Roth don't dash your kids' chances of getting low-cost loans, scholarships and grants.
Be careful though, about taking money out of any retirement account to pay for college, if you qualify for financial aid. Although the tax law now permits penalty-free withdrawals from a traditional or Roth IRA to pay for qualified college costs, doing so could jeopardize financial aid the following year. The entire withdrawal, principal and earnings, counts as income on the following year's aid application.
There's more to Mr. Roth's story ... but I think you get the point.
So, do let me know if you'd like us to make a more direct introduction for you to Mr. Roth. He's a worthwhile person to know, wouldn't you say?
Give us a call (see the number below), or send me an email, and we'll make the connect...
Tony Khait, CPA, PFS