Susan Tompor|Detroit Free Press
Tax season is too often a time offour-letter words. But on a more positive note, youmight want to toadd one moreword to the list — the Roth.
Savers have been able to contribute to the Roth IRA since early 1998 but the rules, and franklythe retirement landscape,have changed significantly over the years. Increasingly, the Roth is turning into onewaythat many cansave more money— or save somewhere else — for retirement. Obviously, noone-size-fits-all answers here.
1) Do you do the Roth? The 401(k)? Or both?
A friend recently wonderedif she should open a Roth IRA. She went online to bump up her 401(k) contributions andthe 401(k) website mentionedRoth IRAoptions. What to do?
Many advisers I spoke with said most people shouldcontribute first to their 401(k) plans in order to snag any matching contributions that the company might offer. After all, if the 401(k) plan offers 50 cents or $1 for each dollar you put in, up to a set percentage, you grab that money.
Frank Migliazzo, managing director The Migliazzo Group, Merrill Lynch Private Banking Group in Troy, said he'stold his children who are just beginning their working careers to save in that 401(k) first. If it's a larger 401(k) plan, many times the fees could be less expensive, too.
Yet "not every employer has a 401(k)," Migliazzo said. And not every employer offers a match.
You could look into atraditional IRA,especially if you meet various limits and would be able to take a tax deduction for a contribution.You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older.
Roth IRA contributions aren't tax deductible. But Migliazzo said many younger consumers could want to set up a systematic plan where they contribute $50 a month or so to a Roth IRA in order to take advantage of thetax-free features of the Roth.
"The big advantage of theRothis that it's totally tax-free — if the government doesn't change the rules on this," Migliazzo said.
If you pay attention to the rules,you typically do not pay taxes on withdrawals from a Roth IRA in retirement and there are no minimum distributions required from a Roth IRA while the owner is alive.
Under a Roth IRA, a saver can contribute up to $5,500 — or up to $6,500 if age 50 or older — in a given year, if one's income falls within certain limits.Single filers with modified adjusted gross incomes below $131,000in 2015 can make at least a partial contribution. Married couples filing jointly can make at least a partial contribution if their modified adjusted gross income is less than $193,000 in 2015.
The phase out— which means that only partial contributions can be made — begins at $116,000 for singles in 2015 and $183,000 for married couples in 2015. (The income limits for the phase-out range go up by $1,000 in 2016.)
One can still contribute to a Roth IRA for 2015 by thetax deadline this yearof April 18 for most of the country. You're able to open a RothIRA even if you have a retirement plan at work.
Christine Benz, director of personal finance for Morningstar, said one of the key benefits of the Roth is that you can withdraw contributions made into a Roth IRA at any time for any reason tax-free. But various rules apply to withdrawals of earnings from that plan in order for those withdrawals to be tax-free.
"Maybe think of your Roth as a way to back up your emergency fund," Benz said.
One big advantage of the 401(k) savings plan is that itenables you toreduceyour current tax bill by contributing moneyon a pre-tax basis into your 401(k) plan.Themaximum amountof money that most people can set aside in a401(k) in 2016 is$18,000 — the same amount as 2015.Savers age 50 and older who are working can contribute another $6,000 — making their maximumup to $24,000.
Some 401(k) plans offer a Roth option for 401(k) contributions — which would be open to employees at all income levels — and other considerations would need to be reviewed there, as well.
2) What's your tax rate likely to be in retirement?
One of the big reasons to go with a Roth is that you think your income tax rate will be higher in retirement than it is today while you're working.
Benz suggests a perfect Roth IRA candidate:Take a young woman who is 25 and working, studying for an MBA at nightand planning to go into management to make far more money in the next 10 years. Her tax rate is bound to go up.
Stuart Ritter, vice president and senior financial planner for T. Rowe Price, said those in their 40s and 50s can consider a Roth, as well, as a way to control their taxable income in retirement.
Spending is not a constant in retirement. Some years, you might have a major medical bill orwant to take a once-in-a-lifetimetrip to China.
If you had some money in a non-taxable Roth account,you could juggle where you get your money. One huge withdrawal from the 401(k) in a year could be avoided and it wouldn't push you into a higher tax bracket in a given year.
3) Ever think of a retirement plan for the kids?
Fidelity Investments recently launched its own"Roth IRA for Kids"that has no account minimum or maintenance fees. If necessary, the child can withdraw the funds penalty-free for a first-time home purchase (up to $10,000) or in the case of qualified higher educational expenses.
Keith Bernhardt, vice president of retirement and college products for Fidelity, said parents and grandparents are looking for ways to give children a head start.
Bernhardt said he put about $225 intosuch a custodial account for his 13-year-old son whoearned money shoveling snow. If the child has income on a W-2 form, it's clearly doable. If the child has babysitting or snow shoveling money, you would want documentation that the child earned money and you couldwant to talk to a tax professional about setting up such an account, Bernhardt said.
"Money can only go into the account if the child has earned income," Bernhardt said.
4) And there's what some call a Roth IRA with training wheels.
Beginning this tax season, savers can use a federal income tax refund money to contribute to anew 'starter' Roth account calledmyRA— which is offered by the U.S. Department of Treasury.
You'd check the savings box in the refund section of your taxreturn.You also can contribute directly to yourmyRA account from your checking or savings account.
ThemyRA is an option for saverswho do nothave access to a 401(k) or lack other options to save. You could contribute if you earn an annual income below $131,000 if single, or $193,000, if married filing jointly, in 2015.
There are no feesand no minimum contributions. But you don't get a choice on how to invest the money here andthe returns aren't huge.Interest earned in a myRA accountis at the same rate as investments in the Government Securities Fund, which earned 2.31% in 2014.
5) Don't overlook the Saver's Credit.
Workers who are 18 and older,not full-time studentsand don't make much moneyshould look into theRetirement Savings Contributions Credit.
The amount of the credit is 50%, 20% or 10% of your retirement plan or IRAcontributions up to $2,000 (or $4,000 if married filing jointly). But tighterincome limits apply.You would not qualify for any credit if you had an adjusted gross income that was more than $61,000 in 2015 if married filing jointly. SeeForm 8880.
Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow Susan on Twitter @Tompor.
