One advantage of passing age 59 ½ is that the 10 percent penalty for pre-59 ½ IRA distributions is less of an issue.
Assuming a taxpayer who is still working qualifies for both a regular deductible IRA and a Roth IRA, what factors should influence his or her account choice? I asked several advisors how they approach the question; here are their emailed responses.
Gilbert A. Armour, CFP
SagePoint Financial, Inc.
It really comes down to the individual choice by the client: Do I want the tax break upfront or at the end? Another consideration for those with earned income after age 70 1/2: A traditional IRA contribution is not allowed after age 70 1/2, but a contribution to a Roth IRA is allowed.
Glenn J. Downing, CFP
It really depends upon the purpose of the money. If the client does not anticipate needing distributions down the road, and is simply saving money for the ultimate beneficiaries, then the Roth makes great sense. If income will be needed, then the evaluation spins on the tax bracket when distributions begin. That could be a toss-up.
Another consideration is the provisional income formula for taxation of Social Security. If that formula yields a number above $44,000, then 85 percent of Social Security becomes taxable.
The RMD (required minimum distribution) from the IRA would have to be considered in light of the formula.
Howard D. Erman, CFP
Erman Retirement Advisory
Roth IRAs are overhyped! Unless they have many years to “ripen,” the tax benefits are minor and non-existent if the taxes are paid out of the traditional IRA when converted.
Contributions after age 59 1/2? Never, unless the tax bracket is low (15 percent or lower) upon contribution. The type of account? That would be consistent with the client’s circumstances, typically investments that participate in growth and are inflation-responsive.
Adam C. Harding, CFP
Here is where I typically recommend a strategic approach to building out a Roth IRA presence in an older client’s portfolio:
Client has a modest lifestyle and is in a low income tax bracket.
Client is not currently taking withdrawals from their tax deferred 401(k), IRA, etc. and most of their general income needs will come from this IRA.
Client has enough resources that they can ‘earmark’ the Roth IRA assets for spending well into the future, thus allowing for the maximum time horizon that individual may enjoy.
Ara Oghoorian, CFA, CFP
ACap Asset Management, Inc.
We recently recommended a client over 59 1/2 open and fund a Roth IRA for both husband and wife as a way to transfer tax-free growth oriented assets to their grandchildren. The clients named their youngest grandchild as the beneficiary of their Roth IRAs. Once the clients pass, the beneficiary can withdraw the funds tax-free (if it’s been five years since the Roth IRA was opened) over their life expectancy. The client must appoint a guardian for the minor.