ROTH or Traditional IRA: Which Is Best?

What makes the most sense for you, staying with a regular individual retirement account or converting to a Roth IRA? This is not a simple question so there is no simple answer. But here are some things to ask yourself.

An individual retirement account is a great retirement savings tool for most individuals. Created by the federal government, IRAs are funded during your working years.  In your retirement, IRAs may help supplement your Social Security benefits.

Your retirement savings begin with your annual IRA contribution. If you are under age 50, the current maximum annual contribution amount is $5,500, according to the Internal Revenue Service.  For those 50 years and older, you can contribute an additional $1,000. So if you turn 50 this year, you are now eligible to contribute $6,500. The contribution amounts are adjusted for inflation each year by the federal government.

With a traditional IRA, you put money away and deduct it until you withdraw from the account in your retirement. You pay tax on withdrawals. Converting to a Roth IRA means you pay tax on your old account up from it, and from then on the account grows tax-free. Opening a Roth without converting is done with after-tax dollars, meaning you already paid the government.

To find out which of the two types, traditional or Roth, is best suited for you, here’s a quick way to weigh the pros and cons of each.

The advantages to a traditional deductible IRA:

Tax Deductible.  Your contribution is deductible on your federal income tax return for the year in which you contribute.

Tax-Deferred Growth.  Your contribution grows tax deferred until you withdraw the money. This means you do not pay any taxes while your money is growing.

Limitations to a traditional deductible IRA:

Adjusted gross income (AGI) limitations.  The amount you can deduct is limited based on your AGI and, if you participate in your employer sponsored retirement plans. Your contribution may be fully deducted on your income taxes, partially deducted or not deductible at all.

10% Penalty.  This is imposed to encourage IRA owners to keep their money in their retirement account until reaching age 59 ½. If you withdraw any of your money prior to then, you incur the 10% penalty on the amount you withdraw. There are some exceptions to the rule: educational expenses, first-time home purchase and certain medical expenses.

Advantages to a Roth IRA:

Avoid taxes in the future. Roth IRAs grow tax-free. Therefore, no taxes are due when you withdraw your money.

No Required Minimum Distributions (RMD).  Roth IRAs do not require RMDs after age 70 ½, so your money can continue to grow with the potential for larger dollar amounts to leave to heirs.

Limitations to a Roth IRA:

AGI limitations.  For high wage earners (2017 limits - single filing over $133,000 and married filing jointly over $194,000), Roth contributions are not allowed.

Disqualified distributions. The earnings in your Roth must remain in the account for five years (known as the five-year clock) and until you reach 59 ½ years. A 10% penalty is applied to earning distributions that do not meet these requirements.

Always consult a financial advisor or IRS publication 590 before you make your final IRA decision. Making the correct IRA choice now can benefit you down the road in your retirement.

Kimberly J. Howard,CFP

KJH Financial Services

Tips for New Investors for the New Year

Whether you’re looking to grow your income to finance your hobbies, expand your business, or contribute to a nest egg, making your investments work for you is surprisingly simple.  Jumping into the investment market as a teen or a retiree makes no difference, there are both quick and slow ways to build up your investments.  Pick an investment type that works for you.

Types of Investments

Each type of investment carries its own set of risks (the probability of liability or loss) and potential gains (quick turn profit or growth over time).  Generally, the more risk involved, the higher potential there is for larger gains or loss.  Buying stocks and shares, for example, offer short-term gains but are a quick way to turn a profit.  Listed below are a few types of investments that people of all ages typically deal with:

Stocks and Shares:  With stocks and shares, the investor buys a percentage of ownership of a public business, therefore making them a part-owner of the business.  Stocks can be highly profitable—the more successful a company or a stock is, the more money you stand to make.  Stocks are high-risk, though, because the market is unpredictable, and the shareholder risks losing some of all of their investments.

Bonds:  Bonds yield little risk, and therefore do not have a high potential for returns.  Bonds are like IOUs that you lend out to companies, councils or the government.  Interest is paid back to the lender on the amount loaned.

Property: Buying, restoring, and renting or selling real estate can potentially net large sums.  Like stocks, however, the market is unpredictable.  It would be best to look at trends in your local area if you’re looking to invest in property.

Certificates of Deposit (CD):  CDs are fixed-period investments with banks or savings and loan companies.  Like bonds, CDs rely on interest and carry a low risk.

Commodities:  Commodities include gold, silver, jewelry and precious metals.  Like stocks, commodities are high risk because their value waxes and wanes in the unpredictable open market.

Mutual Funds:  Mutual funds are a collection of assorted investments that may include stocks, bonds, properties and cash-equivalents, the purpose of which is to create a balanced portfolio.  Mutual funds contain both low-risk and high-risk investments, so sometimes investors consult outside agents to strategize their portfolio to try and achieve the highest potential for profit.

This is only a partial list of investment types.  Other types include but are not limited to: futures, cars, artwork, stamps, hedge funds and foreign exchange currencies.

Planning Appropriately Based on Your Age

If you’re a middle aged business owner that is looking to stretch out your earnings for a retirement plan, but do not have any experience with investing, where do you start?  Your investment trends should change over time.  The younger investor can afford high risk investments, while the older investor should play it safe and be conservative with their options to maximize their savings.

The Young Upstart 

Young investors have the opportunity to learn the market from the ground up, so having a large portfolio is crucial to earning big.  Mutual funds provide a hassle free approach to investments with a high-yield potential.  They get you familiar with multiple investments.  Young investors should carry a higher percentage of stocks than bonds in their portfolios.  A good stocks/bonds percentage should look like 70/30 or 80/20.

Mid-Life Planning

Middle-aged portfolio builders should begin to stay away from riskier investments.  Back off the stocks and mutual funds, and switch to safer, more predictable assets like CDs and bonds.  A middle aged portfolio should contain a stocks/bonds percentage close to a 50/50 split with a higher percentage of stocks at about 55 percent, and gradually reduce stocks down to 20 percent near retirement.

Finely Aged Entrepreneurs

If you are late in the game, don’t worry, there’s a plan for you.  To reduce stress, older investors can always hire a financial advisor that can help you work toward your goals and base a plan on your interests.  Beware of investment fraud.  Older people are often a common target for financial crime and scam artists.  Do not fall for high-pressure sales tactics, intimidation, limited offers, seminars, or “elderly specialists” with bogus certificates and accommodations.  As a rule, it’s best to stick with low-risk investments like bonds, CDs, smart real-estate, gold, fixed income cash investments and long-term care insurance.  A starting portfolio for older investors should be around 35 percent or lower in stocks and 65 percent or higher in bonds. Older investors should look into IRAs, which provide instant tax benefits with annual contributions.

No matter your age, it is important to find an investment plan that works for you—there’s money to be made.