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Give your Retirement Savings the Added Boost it Needs

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Retirement Savings

Roth IRAs over the years has gained more and more traction as investors are seeing the benefits of tax-free growth.  No one knows where tax rates are going to be in 10, 20, 30 years from now, but investors are using Roth IRAs to hedge against these uncertainties.  It also allows retirees to have a little more control over how much income they are “taking” during retirement as they can choose from a tax-deferred account in traditional IRA or 401(k)s or a tax-free account in using a Roth IRA or Roth 401(k).

One of the biggest issues to contributing to a Roth IRA is that a lot of investors are running into income limits and are being completely phased out from contributing.  Roth IRAs also have fairly low caps to how much you can contribute at $5,500 or $6,500 for those 50 or older.  Both of these issues may be overcome using your company’s 401(k) plan.

If an investor’s 401(k) plan allows for after-tax contributions, the investor has the ability to continue investing money into the plan that eventually can be rolled into a Roth IRA.  The IRS has made it clear that they are okay with after-tax IRA or 401(k) contributions being rolled over into Roth IRA’s as a “back door” method.  See Guidance from the IRS in 2014.

Here is how something like this would happen in a 401(k) that allows after-tax contributions:

Step 1 – Investor contributes their max pre-tax amount into their 401(k) plan.  In 2018, that amount is $18,500.

Step 2- Let’s assume that the employer made a matching contribution of $6,000.

Step 3 – Calculate the combined contributions and deduct that from the total annual contributions allowed into a 401(k) in 2018 ($55,000). In this case you would subtract $24,500 from $55,000, which is $30,500.

Step 4 – Contribute up to $30,500 into your 401(k).  This money will be counted as an after-tax contribution.

Step 5 – Let the money potentially grow.

Step 6 – At a “triggering event” such as attaining age 59.5 or separation from service, the after-tax contributions in the plan could be rolled directly into a Roth IRA.

Investors should work with their tax professionals to make sure they understand the details and implications of such a strategy.  For example, a Roth IRA needs to be funded for 5 years before money can be taken out tax-free and penalty-free. Consider working with a financial professional that understands your personal situation in order to see if this is an appropriate strategy for you.

James Schramm  CERTIFIED FINANCIAL PLANNER™
27951 Smyth Dr. Suite 100 Valencia, CA 91355
661 294 9555

Securities offered through Raymond James Financial Service, Inc., Member FINRA/SIPC. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.

Like Traditional IRAS, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contributions may be reduced or eliminated if your annual income exceeds certain limits.  Contributions to a Roth IRA are never tax-deductible, but if certain conditions are met, distributions will be completely income tax-free.  Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.  Additionally, each converted amount may be subject to its own five-year holding period.  Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.  Links are being provided for information purposes only.  Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors.  Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

James Schramm is a financial advisor who runs a boutique investment firm that focuses on creating real wealth for business owners. They use high level investment and tax strategies to allow clients to retire on their terms. Schramm Financial Group was established in 1991 and has been a staple in the greater Los Angeles area. 27951 Smyth Dr. Suite 100 (661) 294-9555 James.Schramm@RaymondJames.com

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