Retirement accounts were covered in Section 7, so we will look briefly at eligibility requirements for different types of retirement accounts.

Roth IRAs
In addition to Traditional IRAs and SEP IRAs, there is a fairly new option called the Roth IRA; unlike these other accounts, Roths are not tax-deferred. An investor does not benefit in the current year from depositing money in a Roth. However, the advantage is that she can withdraw funds from the account tax-free when she retires.

Benefits of Tax Deferral
The whole point of the tax deferral is that, historically, retirees have been in a lower tax bracket than people in their peak earning years, so the tax burden on the money withdrawn from a Traditional IRA upon retirement would be less than the tax on a withdrawal made pre-retirement.

Over the last few years, though, new retirees who either had great pension plans or had invested well discovered that they were in the same tax bracket whether they went to work or spent all day in their backyards.

Therefore, for people who meet the criteria and who anticipate a financially comfortable retirement, Roths make sense.

Tips on Advising Clients on Retirement Account Options
When advising a client on retirement account options, you should consider the following:

  • Type and amount of income: Only earned income can be invested in Traditional or Roth IRAs. Maximum annual contributions, including "catch-up" payments for investors in their 50s and 60s, are mandated by the IRS, while minimum deposits vary with the financial institution. Roth IRA investors may not exceed a maximum adjusted gross income, which differs for single or joint tax filers, changes periodically, and includes a "phase-out" band; if an investor earns more than this maximum income, a Roth is not an option.

  • Participation in an employer-sponsored retirement plan: An investor whose entire earned income comes from an employer that sponsors a pension, a 401(k) or other qualifying plan cannot open an IRA. However, if she has a side business on which she pays additional taxes, she can open up a SEP IRA.

  • Federal tax rate - current and future: Again, someone who expects to maintain his or her current tax rate in retirement may be better off with a Roth IRA.
Important Account Rules

Related Articles
  1. Retirement

    Roth IRAs: The Best Thing Since Sliced Bread?

    Opening a Roth IRA can be a good idea for these nine reasons.
  2. Retirement

    Roth IRA Contribution Limits for 2017 Taxes

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  3. Investing

    IRAs vs. 401(k)s: Differences Between Roth and Traditional

    For each type of account, whether IRA or 401(k), you also need to decide whether you need a Roth or traditional version. Your tax status and other issues will determine which of these are open ...
  4. Retirement

    6 Reasons Not to Recharacterize Your Roth IRA

    If you're thinking of recharacterizing your Roth IRA into a traditional IRA account, here are six compelling reasons why you should reconsider.
  5. Retirement

    How a Roth IRA Works After Retirement

    What retirees need to know about taxes, distributions and passing on your unspent savings to the next generation.
  6. Retirement

    The Most Tax-Effective Retirement Account

    Taxable accounts, traditional IRAs and Roth IRAs all have advantages and disadvantages.
  7. Retirement

    Traditional or Roth IRA: What's the Difference?

    Traditional IRAs and Roth IRAs have similarities and differences investors need to know.
  8. Retirement

    Funding Your IRA vs. Your Roth IRA, Which First?

    The answer depends on where you are in your career and personal life each year. Here are some scenarios and rules to think about.
  9. Retirement

    When Is It Better to Forgo a Roth Account?

    Depending on how much you're currently earning, a traditional IRA sometimes offers more tax relief than its Roth counterpart.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center