The Roth IRA: Why Would I Be Interested?

In the world of investment vehicles only three will provide you with a tax free stream of income. Municipal Bonds, cash value life insurance, and Roth retirement plans can offer ways to grow your savings tax free. Today we’re going to focus on the Roth IRA, but feel free to contact our offices at any time to learn more about all your options.

Many people prefer to save their money for retirement in tax deferred programs. They are assuming that they will be in a lower tax bracket during retirement than they were while they were working. One of the strategies we use in planning for retirement is to create a non taxable stream of income to marry with your taxable stream to reduce your tax obligation each year. The money you save remains in your retirement plans earning interest and gives you a greater chance of meeting your retirement needs through your entire life.

To illustrate this concept, consider an example in which a single person might need $100,000 in a retirement year. If $75,000 of that were taken from a 401(k) or similar tax deferred plan and $25,000 were taken from a Roth IRA, our fictitious client would still take in the $100,000 needed, but only pay taxes on $75,000 of it. 

If our client had been responsible for paying taxes on the full $100,000 and had no other deductions or adjustments, the total tax expense would be $21,293.25 but by adding a stream of non-taxable income we’ve not only dropped the bracket from 28% to 25% but reduced the taxable amount for a total tax expense of $14,678.75. The $6,614.50 saved will remain in the client’s accounts earning further interest.

The Roth IRA contribution limit is $5,500 for tax years 2013 and 2014. The new phaseout limits begin at $181,000 and end at $191,000 for couples filing jointly. What this means is that once the adjusted gross income reaches $181,000 you may not be able to contribute the full $5,500 and after your AGI has reached $191,000 you may not be able to contribute at all. For single people and those filing as head of household, the phaseout range is between $114,000 and $129,000.