August 12, 2019

Part 2: Why Do I Want a Roth Anyways?

Last week we talked about how to get your funds growing tax-free in a Roth account. This week I will explain why you want a Roth and what he Benefits are.

The first benefit is the obvious one. When discussing what a Roth account is the benefit is right in the definition TAX-FREE GROWTH. There are very limited places that you can get tax-free growth. While a Roth has some limitations as discussed last week, it is one of those exclusive places for tax-free growth. Now I personally think of tax-free growth as a “feature” of Roth accounts, so I want to dive in and go through the various “benefits” of that “feature”:

Higher Rate of Return

  • Funds that go into a Roth grow tax free, so if you get an 8% return on that money, you NET an 8% return vs getting the same return in a Traditional IRA, or a Non-Qualified account that you will have to pay taxes on the growth. In those accounts you have to look at what will you actually NET in your pocket return on that 8%. Well if it is a Traditional IRA and you get 8%, but you are in the marginal 22% tax bracket for your income, then when once you pay taxes on that 8% you actually only net 6.24%

Lower tax bill on other income

  • If you have a Roth account built up, then you will be able to “manage” your tax bracket each year to keep you in the lowest possible bracket. Let’s look at a couple of examples
  • Without Roth Money-(using round numbers)
  • Need $60,000 in income
    S. S.- $35,000
    Traditional IRA Income-$29,000
    Tax Bill=$4,170
  • With Roth Money-(again round numbers)
  • Need $60,000 in income
    S.S.- $35,000
    Traditional IRA Income- $14,000
    Roth IRA Income- $11,000
    Tax Bill=$0.00

As you can see this is saving you over $4,000 a year in taxes, or you can look at it this way-every 6 years you give yourself one extra year of income for FREE. If you want to be retired for 24-30 years that means that your portfolio will last 4-5 years longer just with this change. If you look back above you will see the next benefit as well:

Having a Roth account can make your Social Security TAX FREE

  • If you can structure your income to stay under the IRS’s Provisional Income thresholds then you can get all of your Social Security tax-free

Some other benefits are:

  • Having lower medical premiums-most of these including Medicare are income based
  • Paying less in Capital Gains Tax(if applicable)-Again income based and Roth doesn’t show up as income
  • Leaving behind tax-free income to your beneficiaries which allows them to get more benefit on a dollar for dollar basis.

Next week I will do some compare and contrast of who/when someone should be putting funds in a Roth vs a Traditional IRA/401(k)…Don’t want to wait till then? Give me a call and I can talk to you about your specific situation and see if Roth money is right for you!

Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. C. Curtis Financial Group is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.