Series 7

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Customer Accounts - Opening a Retirement Account

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retirees have been in a lower tax bracket than people in their peak earning years, so the tax burden on the money withdrawn from a Traditional IRA upon retirement would be less than the tax on a withdrawal made pre-retirement.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
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