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Enjoy your ‘Roth-tirement’

As we teased in last month’s edition, Roth IRAs are among the most flexible tools you can use to fund your retirement. Now let’s dive straight into exactly how they can help you.

There’s no shortage of benefits. Here are just a few:

• First and foremost, Roths provide tax free-growth.
• By holding both Roth and non-Roth IRAs, you can diversify the tax nature of your retirement funds.
• You can bequeath unused balances tax-free to your heirs.

We don’t believe this brief article could possibly tell you everything you need to know about this complex subject. Even if you bought a 500-page book about Roths on Amazon.com, the only retirement you’re guaranteed to fund is Jeff Bezos’s. The written word is a good place to start, but we encourage you – as with anything related to your long-term investments – to talk one-on-one with a qualified adviser.

Follow the money, and it’ll follow you

The most obvious means to fund Roth IRAs are regular contributions, but they might not fit your situation. If you’ve been flying for long enough to be concerned about your retirement savings, then you might be making too much to qualify for regular contributions. If you’re single and making more than $135,000 or married and clearing $199,000, normal Roth contributions might not be an option for you.

Fortunately – particularly in light of lower tax brackets – there are also methods of converting Traditional IRA funds over to a Roth IRA. Simply put, a Roth conversion means you move money from the traditional IRA to the Roth IRA, and that amount becomes reportable on that year’s tax return as taxable income. But be sure that conversion is what’s best for you because recharacterization – what laypersons call “backsies” – are no longer allowed. As much as anything else you’ll read in this column, that’s reason enough to call in a retirement professional as you formulate your strategy.

In May we told you about “backdoor” Roth contributions. This could well be the best method for you getting money into a Roth IRA. You have to be careful, because there’s some daylight between IRS regulations and recent legislation on Capitol Hill, as Forbes reports.

Roth strategies

Although you’ll almost certainly need some fine-tuning on these points, there are some time-tested methods of making the most of your Roth IRA after you’ve punched your last clock.

First, most people are wisely advised to spend down their taxable money first, then the tax-deferred money in their traditional IRA, 401(k) or other qualified plans. You should probably hold onto your tax-free investments, such as those in your Roth account, and spend those funds last.

Because your Roths are last in line to be tapped, they’re by definition the investments for which you have the longest time horizon. That means it might be suitable to pursue more aggressive growth strategies in your Roth IRA than you would in your other retirement accounts.

Finally, we return to what started us talking about Roths last month: how they can help defray long-term care expenses. This is especially advisable for people with both a healthy balance sheet and a healthy heart, because those people are: a) best positioned to make growth-oriented bets, b) not necessarily going to need long-term care, so they can take advantage of the inheritability feature of this type of retirement account, and c) they stand to benefit the most from being able to control their future tax bills with smart distribution planning from taxable, tax-deferred, and tax-free accounts over time.

Of course, Roths, like any other investments, are not without risks. Potential pitfalls are hidden in the tax code and nested in how you choose to invest the money inside the Roth.

Rules governing potential conversions aren’t written for laypersons so, depending on your existing retirement savings, backdoor Roths won’t always be advantageous. Likewise, the fine print in the regulations concerning what constitutes non-qualified distributions is also difficult to follow. For example, the five-year aging period for Roth contributions applies to each conversion. So if you had conversions in 2014, 2015 and 2016, amounts converted in each year must be five years old to earn qualified distribution status. You could incur financial penalties if you get any of this wrong.

You have to view these strategies through several lenses. Yes, real returns are important, but so is tax planning. So are the relative benefits of active and passive management.

We keep saying it, but we can’t say it enough: Talk to a pro.

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