Roth IRA Basics

April 25, 2024

IMPORTANT DISCLOSURE INFORMATION

The following presentation by New England Capital Financial Advisors, LLC (“NECFA”) is intended for general information purposes only.  No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from NECFA or any other investment professional of your choosing.  Please see additional important disclosure at the end of this penetration. A copy of NECFA’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.newenglandcapital.com.

Roth IRA Basics

Today, we are going to be talking about the Roth IRA and how it can be an important part of your retirement plan, or an important account to open if you are just starting investing.

So, what is a Roth IRA? A Roth IRA is an individual retirement account that you fund using money that has already been taxed, that money then grows tax-free, and can be withdrawn tax-free once you reach the age of 59.5, with a few exceptions. So, you don’t get a tax break up front, but your contributions and investment earnings grow tax-free.

To be eligible to fully contribute to a Roth IRA, you must have earned income below $146,000 (single filers) or below $230,000 (married filing jointly). In 2024, the contribution limit is $7,000 or $8,000 if you are over 50.

What if you need to take money out before 59.5? You can withdraw your original contributions tax and penalty free whenever you want. There are also a handful of a circumstances where you would not pay taxes or penalty on an early withdrawal. For example, if you are a first-time home buyer you can withdraw up to $10,000 of Roth IRA earnings without taxes or penalties. If you withdraw earnings that don’t meet any of the special circumstances you will owe federal income tax and a 10% penalty on any earnings that are withdrawn.

Having a Roth IRA as part of your retirement plan can be very important. Say you want to withdraw an extra $20,000 from your retirement accounts to fund a vacation, but you don’t want it to affect your tax bracket or Medicare premiums. Withdrawals from a Roth IRA do not count as earned income, so this withdrawal will not affect your tax bracket or Medicare premiums.

If you are just starting investing, a Roth IRA may make sense for you. Since you fund a Roth IRA with after-tax money, it could make sense to fund the account when you are younger and in a lower tax bracket than you will be when you are closer to retirement.

Let’s look at a scenario where it may make sense to contribute to Roth IRA instead of Traditional IRA or 401k, where you would get a tax deduction now and then pay income tax when you withdraw the money in retirement. In this example, let’s say the client is 25 years old and their average tax rate is 15%. When this client decides to retire at age 65, since their income is higher than when they were 25, let’s say their average tax rate is 20%.

If they want to contribute $1,000 to their Roth IRA at age 25, after taxes they would be able to put in $850. If they contributed to a pre-tax retirement account, they would put the entire $1,000 in now and not have to pay the $150 in taxes.  Let’s just say that each investment has grown 10 times as big at retirement time. The Roth account with $850 would now be worth $8,500 and the pre-tax account with $1,000 would be worth $10,000. If they were to withdraw the full amount from both accounts, they would be able to take the $8,500 from the Roth IRA tax free but would owe taxes on the $10,000 in the pre-tax account. Since they are in a higher tax bracket at this point, after taxes they would only be left with $8,000, $500 less than the Roth IRA. In this case, contributing to the Roth IRA resulted in a total of $350 in tax savings. This is a great example of why it could make more sense to contribute to a Roth IRA when you are in a lower tax bracket.

This has been a basic introduction to the Roth IRA, if you have any further questions, you can reach out to any of us here at New England Capital and we would be happy to have a conversation with you.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by New England Capital Financial Advisors, LLC [“NECFA”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from NECFA. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. NECFA is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the NECFA’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.newenglandcapital.comPlease Note: NECFA does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NECFA’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a NECFA client, please contact NECFA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.