What Others Are Saying...
Quotes
"We're the first generation in the history of this country to make it worse for the next one.”
-Candy Carson, wife of republican presidential candidate Ben Carson, (October 2015, as reported on all national networks.)
"The services and products that have shaped our economy were all new and questioned ideas at one point. Few, if any, could have predicted the incredible changes the internet brought, but with it came ideas that seemed like science fiction only a few years earlier.
The game changers are not the ones that give you what you want, they give you what you need next. By staying one step (or many) ahead of the demand, game changers deliver more than a service, they are what dreams are made of."
-Zacks Weekend Wisdom Brian Bolan. (October 17, 2015)
"In a Roth IRA, your money can grow tax free and and distributions are also tax free, so a Roth can be a great way to lower your income tax in retirement. The same amount withdrawn from a 401K or Traditional IRA could increase the tax rate on your Social Security income."
- By Kelley Holland * The Fiscal Times. (September 5, 2015)
"The best retirement savings vehicle for the majority of millennials is a Roth IRA."
- CNBC (Sep 9, 2015)
"Open a Roth IRA and you can make your children rich. Another nice thing about Roth IRAs: Under current rules, the money doesn't have to be withdrawn during the owner's lifetime. So if your child has other resources to pay for retirement, the Roth could be passed on to the next generation, making your grandchildren not just rich, but very rich."
- By Greg Daugherty * Bankrate.com
"One of the smartest money moves a young person can make is to invest in a Roth IRA."
- Kiplinger by Kevin McCormally. (January 2015)
"If your retirement money is in a traditional IRA or an employer-sponsored retirement plan like a 401(k), the government requires that you start taking distributions once you turn 70½ years old. But that's not the case with a tax-friendly Roth IRA, and that's been a big advantage for savers who want to use it later in life or pass it on to heirs."
- Jennifer Barrett * CNBC. (March 2, 2015)
College & Roth IRA
"Ten years after graduating college the average non Ivy League income is less than $35,000 annually."
Source: President's 2015 college scorecard published by the Department of Education using IRS tax data.
Roth IRAs for college? Why would anyone use a retirement account to save for education expenses when there are accounts specifically designed for that? Roth IRAs add several different education savings dimensions. Here are three of them to consider.
When a child goes to college, if they want to receive student aid, the filing of a Free Application for Federal Student Aid is pretty much a must. The form is designed to calculate what's known as the expected family contribution. The EFC is essentially the amount that Uncle Sam thinks a person should pay for their own education and is calculated, in part, based on the assets of a student and his or her parents.
When reporting assets on the FAFSA form, most assets, including 529 plans, are included in the calculation. That means that saving for a child's education in a 529 plan -- a plan expressly designed for that purpose -- could end up increasing a Client's EFC, reducing or eliminating the amount of financial aid for which they would otherwise qualify.
On the other hand, Roth IRAs (along with other retirement accounts) are not considered assets when determining a family's EFC. In addition, there's no cap to that amount, so Clients may actually be able to accumulate significant sums in Roth IRAs and still qualify for student aid for a child.
To encourage people to contribute to 529 accounts, Congress created special tax breaks. As long as 529 plan distributions are used to pay qualified higher education expenses, distributions are 100% tax free (in some states, Clients may also be entitled to a state income tax deduction). But if for some reason the funds in the 529 plan are not used for qualifying expenses, distributions can go from being tax free to being taxable, plus a 10% penalty. True, a 529 plan set up for one child's benefit can be transferred to an account for another qualifying family member, but such a person does not always exist.
For obvious reasons, Clients are encouraged to start saving for college as early as possible. But how are Clients supposed to know for sure if their 5 year old child will go to college, or whether the child might receive a scholarship? That could turn a tax efficient account into a tax nightmare. If, instead of saving money in a 529 plan, your Client had saved the same money in a Roth IRA and no longer needed those funds for education, it's an easy and tax efficient transition to use those funds in retirement, which brings us to our next point.
The primary purpose of contributing funds to a 529 plan is to enjoy tax free distributions for education purposes, but a Roth IRA often provides the exact same tax benefits. If your Client is over age 59½ at the time they take distributions from their Roth IRA and they've had any Roth IRA for five years or longer, then anything they take out of their Roth IRAs will be 100% tax and penalty free. That's true whether they use the funds for education related exp enses or for any other purpose. With more people waiting to get married and have children, it is increasingly common for education related expenses to be incurred after the five years and 59½ requirements are met.
Even if your Client is not 59½ (or has not met the five year holding period) at the time education related expenses need to be paid, they may still be able to take funds out of their Roth IRA tax and penalty free. Roth IRA contributions can be distributed at any age, and at any time, 100% tax and penalty free. So, for instance, if they contribute $5,000 per year to a Roth IRA for the next 10 years before their child goes to college (and take no distributions in the interim), they'd be able to take $50,000 tax and penalty free from their Roth IRA.
In addition to Roth IRA contributions, amounts converted to a Roth IRA may also be distributed tax and penalty free. Even if your Client is under 59½, Roth IRA conversions can be withdrawn tax and penalty free as long as the conversion took place five years ago or longer.
Ed Slott * Investment News July 26, 2015
The millionaire making power of the Roth:
The miracle of compounding is what can make money grow more and more briskly over time. Imagine a sum, say $10,000, growing by 10% annually, for example. In the first year, it's 10% bigger, increasing by $1,000, to $11,000.
In the second year, that $11,000 grows by 10% which is now $1,100 and you end up with $12,100. The year after, that result grows by 10% ($1,210), becoming $13,310. The point here is not only to see how, in just a few years, your initial $10,000 is growing but that the amount by which it's growing is growing, too! First $1,000, then $1,100, then $1,210, and $1,331. The Roth IRA can make the compounding effect even stronger for you, because it takes taxes out of the equation. The money you contribute is post tax money but it grows and gets withdrawn tax free.
The Motley Fool
How 20-somethings think:
Personal finance: Should 20-somethings save?
“I don’t have any savings,” said Lauren Martin in EliteDaily.com, and I couldn’t care less. In fact, I strongly believe that “if you have savings in your 20s, you’re doing something wrong.” Until recently, I had been frantic to save money, rarely eating at restaurants or going out with friends. I was too busy stressing about saving instead of “savoring my youth.” But then a very successful friend gave me a piece of advice: “Don’t save money. Make more money.” So now I spend without guilt. My 20s are for taking risks and enjoying life, not sacrificing to contribute to a 401(k). We Millennials are on different schedules than our parents were on at our age, from getting married to having kids to buying houses. “We’re not trying to live with safety nets.” We want to bet all our chips and reach higher. Putting aside “$200 a month isn’t going to make the dent that a $60,000 pay raise will after spending all those nights out networking.”
This advice is “jaw droopingly wrong,” said L.V. Anderson in Slate.com. Martin wants to pretend that a few dollars saved now won’t help her retire some day. Has she really never heard of compound interest? She also insists that spending money today somehow translates into confidence and professional success. But “it’s not lack of a belief in oneself that’s standing between Millennials and $60,000 raises.” It’s the fact that wages have been utterly stagnant for years, while the cost of education, housing, health care, and basically everything else has gone up. You simply “don’t want to get to your 30s or 40s and find you have no money in the bank,” said Timothy Lee in Vox.com. The days when you’ll have kids and mortgages and sick parents may seem like a lifetime away when you’re 25, but “they are closer than you think. Sorry.”
Martin is right that taking risks in your 20s is “an undeniably great idea,” said Susie Poppick in Time.com. But spending your paycheck on overpriced drinks at a club in the name of “networking” is not the same as buying computer coding or foreign language lessons that will actually help you score that raise and promotion. And just because retirement is decades away and you’re happy to rent forever doesn’t mean you won’t face unexpected costs tomorrow, said Shane Ferro in HuffingtonPost.com. You might lose a job, need a new apartment immediately, or have an unexpected medical bill. Everyone needs an emergency fund, and “saving for big things takes time.” So spend what you need to in your 20s. “Just don’t spend so much that it kills your quality of life in your 30s. (And 40s. And 50s.)”
THE WEEK October 9, 2015
Senator Roth:
What Senator William Roth Envisioned For The Roth IRA
August 30, 2011
Before his death in 2003, Senator William Roth Jr. from Delware, gave an interview where he discussed what he and the Senate Finance Committee had originally envisioned for the Roth IRA. It is a little like looking behind the curtain at the Wizard of Oz into a glimpse of the thought process behind creating the Roth IRA and how it has morphed into such an important retirement tool for so many Americans.
When the landmark legislation was passed as part of the Taxpayer Relief Act of 1997, Senator Roth and his colleagues did not quite know what they had created and how much of an impact it would ultimately have on Americans and their ability to have a financially secure retirement. Since 1997, the Roth IRA has not only grown in stature and popularity, but it has become one of the cornerstones of many Americans’ retirement portfolios.
In 2000, 46.3 million taxpayers held IRA accounts worth a total of $2.6 trillion in value according to the Internal Revenue Service (IRS). Only a little over $77 billion of that amount was held in Roth IRAs. By 2007, the number of IRA owners has jumped to over 50 million taxpayers with $3.3 trillion invested. After reading interviews with Senator Roth, it is clear that while the investment account has exploded in esteem, it is still grounded in the ideals it was created to perpetuate.
Roth IRAs Humble Beginnings
Originally, American taxpayers were only allowed to contribute up to $2,000 of their after tax earned income to a Roth IRA, and there was not a catch up contribution allowed for citizens over the age of 50 yet. It took several years for the contribution limits to increase to the current amounts of $5,000 per taxpayer or $6,000 if you are making a catch up contribution if you are over 50 years of age.
Also, originally the Roth IRA had a contribution limit of $150,000 per year for couples and $95,000 for individual taxpayers. Today, the income limits to be eligible to contribute to a Roth IRA start to phase out at $169,000 and $105,000 for joint and single filers respectfully. And you can continue to contribute to a Roth IRA at a partial contribution level all the way up until you earn $179,000 as joint income tax filers and $120,000 as an individual. (Learn about all of the various Roth IRA rules.)
A Roth IRA Builds On The American Dream
In Senator Roth’s interview, he often compared the Roth IRA as a way to realize the American Dream. He told his interviewer, Dr. Gobind Daryanani, that “if you work hard and save hard, you can have a good retirement income that allows you to leave something to your children.” Like most American and even other citizens around the world, parents want to provide their children with a better life than the one they had, and the Roth IRA is an excellent tool to do just that.
A Roth IRA allows investors to leave Roth IRAs to their children or other beneficiaries that they designate. There are no tax implications when Roth IRAs are transferred to a spouse at death, and non spouse beneficiaries have options on how to disburse a Roth IRA that is bequeathed to them. A Roth IRA can be used to avoid estate tax as well.
Easier Withdraws For The American Dream As Well
Senator Roth discussed in his interview with Dr. Daryanani that he wanted the Roth IRA to be a flexible financial tool that would attract young investors as well as seasoned ones. This is why the Senate Finance Committee permitted easy, tax free withdrawals from a Roth IRA for items such as a first home purchase or educational costs. One of Senator Roth’s goals with the Roth IRA was to “develop a culture of savings”. His committee wanted to see young investors starting their retirement investing early with even small amounts of money, possibly using dollar cost averaging.
It is interesting to see that there was a long term vision when Senator Roth and his Senate Finance Committee developed the Roth IRA. While no one probably could foresee the investment’s incredible popularity that is boasts today, Senator Roth continued to strive for more with the account. That is why we have seen an increase in contribution limits and income limits for the accounts.
The interview with Dr. Daryanani ends with him asking Senator Roth if he had met his goal with the creation of the Roth IRA. Senator Roth replied, “I’m never satisfied. I always want to do more.” The Roth IRA will continue to evolve and grow into an even stronger tool in financial planning for retirement as we strive to realize the American Dream. Don't hesitate. You can start a Roth IRA with a small amount of now and build on it just like Senator Roth wanted.