Believe it or not, a Roth IRA is a form of tax rate insurance. The other day a client nearing retirement brought in his 401(k) statement. There was little over $1,000,000 in the account. He smiled as he told me about enjoying leisurely afternoons with his wife, spending time with his grandkids, and visions of cruises on the Mediterranean. Sadly, he did not realize that the IRS would be tagging along on those cruises. The IRS will get about $240,000 of his nest egg. If you want your entire retirement amount to be all yours consider contributing to a Roth IRA. A Roth IRA offers tax rate insurance.
How does a Roth IRA work as tax rate insurance?
With Earned Income you can open a Roth IRA and contribute up to $6,000 per year ($7,000 per year if you are 50 years of age or older). You contribute to a Roth IRA with after-tax money. No taxes ever again! No taxes paid on dividends or capital gains. You can buy and sell investments to rebalance your portfolio without tax consequences. You can withdraw the money tax-free in retirement! Sound great? That’s because a Roth IRA offers tax rate insurance. There are other merits.
Your investment options in a 401(k) plan are limited. In a Roth IRA your investment options are limitless. Also, there is greater flexibility to move your assets to whatever firm you prefer.
With a 401(k) plan, the money is usually invested before it is taxed. When you take the money from the 401(k) plan in retirement, you will have to pay a tax, just like my client.
Oh, and the expense fees are lower in a Roth IRA versus a 401(k).
Roth IRA assets are protected up to $1,362,800 in all states, and some states grant unlimited protection.
Do you have insurance on your home? What about health insurance? Establish a Roth IRA today to get tax rate insurance!
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