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.