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retirees have been in a lower tax bracket than people in their peak earning years, so the tax burden on the money withdrawn from a Traditional IRA upon retirement would be less than the tax on a withdrawal made pre-retirement.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 IRA Contribution Limits in 2016

    Discover the benefits of Roth IRA accounts and how much you can contribute for your retirement. Learn which IRA plan is best for you.
  2. 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.
  3. Retirement

    Why Now Is The Time For A Roth IRA

    Legislative changes in recent years make Roth IRAs worth a second look.
  4. 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.
  5. Retirement

    Roth IRAs: Introduction

    The Roth IRA is a retirement saving account to which individuals can make contributions with after-tax dollars. If certain requirements are met, distributions from the Roth IRA will be tax-free. ...
  6. Retirement

    The Best Strategies to Maximize Your Roth IRA

    If a Roth IRA makes sense for you, here are ways to build the biggest nest egg possible with it.
  7. Managing Wealth

    Why Roth IRAs May Make Sense for the Wealthy

    A look at how Roth IRAs can reduce the tax bill for even the wealthiest taxpayers.
  8. Retirement

    Options and Roth IRAs: Do's and Don'ts (SCHW)

    A breakdown of the do's and don'ts of trading options in a Roth IRA.
  9. Retirement

    How Much It Takes to Max Out Your IRA

    IRAs have certain tax advantages that allow your nest egg to grow at a faster rate. But there are annual limits on how much you can contribute.
  10. Financial Advisor

    Will the Backdoor Roth IRA be Eliminated?

    The President’s 2017 budget has proposed several changes to the rules regarding retirement accounts with those for Roth IRAs being the most drastic.
Trading Center