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Financial Planning > Tax Planning

A Roth IRA Refresher

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We celebrated the 20-year anniversary of the Roth IRA in 2018 for we tax geeks who like to celebrate that type of thing. However, even though these accounts have been around for that long, there is still so much confusion about them.

The benefits of a Roth IRA are clear — the potential for tax-free distributions in retirement. This means any growth in the account is never taxed, and in this uncertain tax and fiscal environment that can be a powerful benefit.


  • Links to our latest articles about Roth IRAs are available here.
  • A link to an earlier Jeremy Hus article, “Rethinking Retirement Income,” is available here.

Of course, anyone who reads this article should keep the following in mind:

A financial representative does not provide tax or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.

That said: Many of your clients will want to talk to their legal and tax advisors about Roth IRAs.

You may work with Roth IRAs all the time. If not, and your memory of how they work has grown hazy, here some things to know about them.

1. Criteria to Be Met

For distributions to be tax-free or “qualified”, there are a couple of criteria that need to be met. The most common would be attaining age 59 ½ and holding the account for five years. The important thing to note here is the “and”. Both criteria need to be met, so if my first Roth IRA contribution isn’t until age 58, I would have to wait until age 63 to receive the benefit of tax-free earnings.

Surprisingly, Congress was generous when creating this rule. A contribution made for a specific tax year is considered to be made as of Jan. 1 of that year. Also, this test only needs to be met once, so if I contributed one dollar to my IRA five years ago, the requirement has been met for all future contributions. That’s why it’s so important to contribute, no matter how small, as early as you can to get that five-year clock ticking.

2. Other Ways No Fun

There are only a handful of other ways to receive earnings tax-free, and most of them aren’t fun, which would include death or disability. The death exception obviously doesn’t apply to the account owner, but rather the beneficiaries, or the people inheriting the account. The other is for a first-time home purchase and is limited to $10,000.

Any other withdrawal will be a non-qualifying distribution. Typically, this will result in ordinary income tax plus an additional 10% penalty. Of course, there are a handful of exceptions to this, including higher education expenses, deductible medical expenses, and an IRS defined term of “substantially equal periodic payments” to name a few. It’s important to note, while these exceptions will waive the 10% penalty, any amount that is considered earnings will still be subject to income tax.

3. Roth Flexibility

The operative word there is “earnings,” which bring us to an often-misunderstood rule of the Roth IRA. The contributions that have been made to a Roth IRA over time can always be withdrawn at any time for any reason with no tax and no penalty.

Consider this example: Megan is currently age 48. Over her lifetime she has contributed $50,000 to her Roth IRA. The account over that time has grown to $90,000. One Friday, she decides that she wants to take a $50,000 withdrawal and fly to Las Vegas and test her luck. She can do so from her Roth IRA and have no tax consequences. The next dollar withdrawn however would be subject to tax and penalty unless one of the exceptions outlined above apply.

While Megan’s idea may sound like a lot of fun, it obviously isn’t smart from a financial planning perspective. But it does highlight the amount of flexibility a Roth IRA provides. When used in conjunction with a sound retirement strategy, it can be one of the most powerful savings vehicles available.

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Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202105-248406 (Photo: Barnum)

Jeremy Hus, MSFS, CFP, ChFC, CASL, CLU,  is vice president of financial planning at Barnum Financial Group of Shelton, Connecticut. He can be reached at (203) 513-6169.


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