If financial planning was a sport, what financial tool would be the “Tiger Woods” of our era? Which strategy is considered to be the best option out there? Just as there could be other opinions about who today’s best golfer is, there could be quite a few retirement strategies that would get a few votes as well. However, without getting overly formal in our comparison of the alternatives, here are a few of the main points that would have to be taken seriously.
Taxation – How about zero taxes on your gain! Depending upon your age and situation, it may make more sense than tax deductible Individual Retirement Accounts (IRAs) where taxes are paid on the gain when it comes out, and people taking refuge in “low capital gains” rates, especially since taxes are likely to go up someday.
Investment Freedom – Most people know that you can own CDs, stocks, bonds and mutual funds in a Roth IRA, but few know that you can also own real estate, secured corporate notes, oil well interests, gold bullion, and on and on. How is that for the opportunity to diversify the potential for tax free for life to boot?
Ease of Use – If you wait until age 59½ to withdraw from it and provided the account has been open for at least five years, there is no investment basis to keep track of, no actuarial tables, and no cost of insurance. You can give your investments the opportunity to grow for any amount of time, and did I mention the potential for it to be tax free?
The Tricky Part – From a financial planning standpoint, the challenge is getting the money into a Roth IRA. You are limited as to how much you can contribute each year, and if your income’s too high, you can’t contribute to it at all. Another way to get money in is to convert a Traditional (or “regular”) IRA, which is an especially interesting idea when the stock market is down. If your investments in your traditional IRAs are down, and you convert to a Roth, any recovery of the prices would occur tax free.
Another good reason to consider converting sooner than later is the likelihood of higher taxes. It’s a great thing for you or your financial planner (if you have one and can delegate this annual decision) to talk about with your tax advisor. You will incur current income taxes on however much you convert. However, it could make sense to convert a little each year for the benefit of your tax-free financial future. After all, like Tiger, there is only one Roth IRA.
There are a few things that cannot be held in a Roth IRA including collectible art and coins. Investing involves risk of loss. Past performance does not guarantee future results. The Roth IRA offers tax deferrals on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions apply. Withdrawals prior to age 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. The Financial Consultants of Upton, Draughon & Bollinger are registered representatives with, and Securities offered through LPL Financial, Member FINRA/SIPC 207 Ansley Blvd., Suite A, Alexandria, LA 71303, (318) 442-4944.
